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Overtime Rule for Salaried Employees Explained

Amanda Hagerty
Reading time 4 Mins
Published on Oct 5
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In 2014, President Obama directed the Secretary of Labor to update the overtime regulations to reflect the original intent of the Fair Labor Standards Act, and to simplify and modernize the rules so they’re easier for workers and businesses to understand and apply. The department has issued a final rule that will put more money in the pockets of middle class workers – or give them more free time.

What is the purpose of the Overtime Final Rule?

This Final Rule updates the regulations for determining whether white collar salaried employees are exempt from the Fair Labor Standards Act’s minimum wage and overtime pay protections.

  • Raise the salary threshold indicating eligibility from $455/week to $913 ($47,476 per year), ensuring protections to 4.2 million workers.
  • Automatically update the salary threshold every three years, based on wage growth over time, increasing predictability.;
  • Strengthen overtime protections for salaried workers already entitled to overtime.
  • Provide greater clarity for workers and employers.

The final rule will become effective on December 1, 2016

Employers have a wide range of options for responding to the changes to the salary level. Employers can choose the one that works best for them.

Options include:

overtime-rule-pictures

  • Raise salary and keep the employee exempt from overtime: Employers may choose to raise the salaries of employees to at or above the salary level to maintain their exempt status, if those employees meet the duties test (that is, the duties are truly those of an executive, administrative or professional employee). This option works for employees who have salaries close to the new salary level and regularly work overtime.
  • Pay overtime in addition to the employee’s current salary when necessary: Employers also can continue to pay their newly overtime-eligible employees the same salary, and pay them overtime whenever they work more than 40 hours in a week. This approach works for employees who work 40 hours or fewer in a typical workweek, but have occasional spikes that require overtime for which employers can plan and budget the extra pay during those periods. Remember that there is no requirement to convert employees from salaried to hourly in order to calculate their overtime pay!
  • Evaluate and realign hours and staff workload: Employers can ensure that workload distribution; time and staffing levels are all managed appropriately for their white-collar workers who earn below the salary threshold. For example, employers may hire additional workers.
  • Bonuses, incentive payments, and commissions: The final rule will allow up to 10 percent of the salary threshold for non-HCE (Highly Compensated Employees) employees to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis. This recognizes the importance these forms of pay have in many companies’ compensation arrangements, particularly for managerial employees affected by the final rule. This is a new policy that responds to robust comments received from the business community on this matter.

For more information regarding bonuses please click here

Further Consideration for Sales, Higher Education, Doctors, Lawyers, Business Owners:

Certain white collar employees, such as some of those in sales, bonafide teachers, doctors, lawyers, and business owners, were not subject to the same (or any) minimum salary threshold previously, and that has not changed. All other employees classified under a White Collar Exemption must make at least $913 per week, or $47,476 per year, when the new rule goes into effect.

The salary threshold will not fluctuate based on the number of hours worked, nor is there any pro-rating, so part-time and full-time employees will be subject to the same rule.

As a reminder, to qualify as exempt, employees who meet the minimum salary threshold must also be paid on a salary basis – meaning their pay doesn’t fluctuate based on number of hours worked or the quantity or quality of their work – and they must pass the duties test for at least one of the FLSA’s exemption categories.

Generally, three requirements must be met for an employee to be exempt from overtime and minimum wage:

  • Employee is considered an executive, administrator, professional, or outside salesperson
  • Employee is paid on a salary or fee basis (except for outside-sales employees)
  • Employee is paid at a minimum rate (this rule is what is changing)

Here are two options for employers:

  1. Increase impacted employees’ wages to meet the new threshhold
  2. Change the FLSA status to nonexempt for impacted employees and start paying overtime

The Final Rule also raises the compensation level for highly compensated employees subject to a more minimal duties test from $120,000 to $134,004 annually.

The Final Rule also establishes a mechanism for automatically updating the salary and compensation levels every three years, with the first update (after this year) to take place in 2020.

For further information, read more here

View the full published government document here


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