Upcoming Changes to Employee Overtime Pay: What is the FLSA’s “Final Rule” and How Will it Affect Your Business?

By Evan Koch

A number of business owners have recently contacted our office regarding the Department of Labor’s (“DOL”) new overtime pay rule that is going into effect on December 1, 2016. These business owners are specifically wondering what this new overtime rule is and how it will affect their business. With the effective date for this new rule rapidly approaching, now is the perfect time for employers to learn what they can about the upcoming changes in the law and determine what actions, if any, they will need to take to comply with the law.

WHAT IS THE DOL’S NEW OVERTIME RULE?

On May 18, 2016, the DOL finalized a new overtime rule (the “Final Rule”) under the Fair Labor Standards Act (“FLSA”), which increases the minimum salary level that certain workers must meet to qualify for one of the major exemptions to overtime pay under the FLSA: the “white-collar” exemption.

As a little background: The FLSA requires that most employees in the United States be paid (1) at least the federal minimum wage for all hours worked and (2) overtime pay for all hours worked over 40 in a particular workweek. However, the FLSA provides an exemption from both the minimum wage and overtime pay requirements for certain “white collar” workers who are employed as executive, administrative, and professional employees. Examples of employees who generally fall into this exemption are executive assistants, retail managers, engineers, and creative professionals.

To currently qualify for this “white collar” exemption, an employee must generally: (1) receive their full salary for any week they perform work; (2) earn at least $455 per week; and (3) have primarily executive, administrative, or professional job duties assigned to them. If an employee qualifies for this “white collar” exemption, that employee is exempt from the FLSA’s minimum wage and overtime pay requirements.

However, under the Final Rule, the minimum annual salary threshold for this “white collar” exemption will be increased from $455 per week ($23,660 annually) to $913 per week ($47,476 annually), starting on December 1, 2016.¹ The Final Rule also allows employers to now count bonuses and commissions towards as much as 10 percent of the salary threshold.

The “white collar” exemption also applies to “highly-compensated” workers who “customarily and regularly” perform one of the exempt duties of an administrative, executive or professional employee (though it is not their primary job duty) and who have a total annual compensation of at least $100,000. The Final Rule similarly increases the income requirements of this exemption from $100,000 per year to $134,000 per year starting December 1, 2016.

HOW WILL THIS FINAL RULE AFFECT MY BUSINESS?

Short Answer: The Final Rule will not affect compensation of non-exempt employees, as the changes in the Final Rule primarily pertain to employee eligibility for the “white collar” exemption. Accordingly, unless you are currently utilizing the “white collar” exemption for your employees, the Final Rule will not likely affect your business.

Long Answer: If you do have employees who currently qualify for the “white collar” exemption, then the Final Rule might affect your business. Until recently, many California businesses did not generally worry about the federal minimum salary thresholds for the DOL’s “white collar” exemption because the California salary requirements for the state’s “white collar” exemption were so much higher. To qualify for this exemption in California, an employee currently must be paid a monthly salary that is at least twice the minimum wage ($10.00 per hour), or $41,600 per year. Because the Final Rule will make the federal standard more demanding than the existing California standard, employers will now need to comply with the Final Rule if they wish to maintain their employees’ “white collar” exempt status.

In other words, the employees likely to be affected by the Final Rule in California would include those employees who are treated as exempt employees and make between $41,600 and $47,476 per year. If your business has employees who fit within these parameters, you should evaluate your current employee classifications and determine whether any currently exempt employees will lose their exempt status as a result of this Final Rule.

I HAVE EXEMPT EMPLOYEES WHO WILL BE AFFECTED BY THE FINAL RULE. WHAT SHOULD I DO NEXT?

Employers will have a number of options at their disposal for responding to the Final Rule, ranging from simply allowing the employee to be reclassified as non–exempt to adjusting the employee’s salary to maintain exempt status. Employers will want to perform their own cost-benefit analysis to determine what response, if any, is most appropriate for them. For some employers, it may be more cost effective to reclassify an employee as non-exempt and pay overtime when necessary, if the amount of overtime hours worked by that employee would be minimal. For other employers, it may be more cost effective to increase their employees’ salaries in order to avoid reclassifying an employee and paying significant overtime wages.

Because the Final Rule will not go into effect until December 1, 2016, employers still have sufficient time to review their employee classifications and implement any plans to comply with the upcoming changes. To the extent that you need assistance in making this evaluation, be sure to contact an employment law attorney to assist you with this process.

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.

¹ The Final Rule also established a mechanism to automatically update these minimum salary thresholds every three-years, so the changes coming on December 1, 2016 will likely be changed again in 2019.