Final Rule Expands Overtime Pay Protection (Benefit Minute)

Posted in: Benefit Minute, Employee Benefits

The Department of Labor has issued a final rule that revises the overtime exemption under the Fair Labor Standards Act (FLSA). The final rule updates the salary level for the “white collar” exemption under the FLSA and will make more workers eligible for overtime pay. The FLSA generally applies to enterprises that generate revenue of at least $500,000 annually and individual employees who are engaged in any type of interstate commerce.

Current Rule
Under the current rule, there are three criteria for the “white collar” exemption:

• The employee must be paid on a salary basis not subject to reduction based on quality/quantity of work (salary basis test);
• The employee must meet a minimum salary level of $455 per week which is equivalent to $23,660 per year (salary level test); and
• The employee’s primary job duty must involve the kind of work associated with exempt executive, administrative or professional employees (standard duties test).

For the administrative exemption to apply, the employee’s primary duty must be performance of office or non-manual work directly related to the management or general business operations of the employer or its customers. In addition, the employer’s primary duty must include exercise of discretion and independent judgment with respect to matters of significance. There are other similar requirements for the professional and executive exemptions.

New Rule
Under the new rule, there is no change to the duties test or the salary basis test. However, the salary level will increase to $913 per week which is equivalent to $47,476 per year. This amount was set based on the standard salary level at the 40th percentile of earnings of full time salaried workers in the lowest-wage Census Region (currently the South). For highly compensated employees who are subject to a more minimal duties test, the annual compensation requirement has been increased to $134,004 (from $100,000) and was set based on the 90th percentile of full time salaried workers nationally. The final rule also provides a mechanism for automatically updating the salary and compensation levels every three years to maintain them at the above percentiles.

The new rule allows employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the required salary level. Such payments must be made no less frequently than quarterly. This does not apply to highly compensated employees since the current rule already allows employers to use commissions, nondiscretionary bonuses and other forms of nondiscretionary deferred compensation to meet the annual compensation requirement.

Options for Employers
The final rule has no impact on “white collar” employees who do not work any overtime hours. The employer can continue to pay these individuals a weekly amount that is less than the new salary level as long as the employee does not work more than 40 hours in a week. Employers may use any method they choose for tracking hours of employees who are entitled to overtime, as long as such system is complete and accurate.

Employers who are concerned about overtime hours have several options to comply with the new requirements. These include:

• Raising salaries to maintain the exemption at the new salary level;
• Continuing to pay current salaries, with overtime at time and a half after 40 hours;
• Reorganizing workload, adjusting schedules, or spreading work hours to eliminate or substantially reduce overtime hours; and
• Converting employees from salaried to hourly paid with overtime at one and a half times the hourly rate after 40 hours.

Impact on Employee Benefits
Provisions of the Affordable Care Act and nondiscrimination requirements that apply to most retirement plans, section 125 cafeteria plans, and self-insured medical plans already make it challenging for employers to base eligibility on an employee’s status as salaried/hourly or exempt/non-exempt. However, to the extent that an employer does offer different benefit options, the employer’s approach to complying with the new overtime rules may impact an employee’s benefit eligibility. For example, certain employees who were formerly exempt will now be classified as non-exempt (if salaries are not raised to meet the exemption level) or certain employees who were formerly classified as salaried will now be in the hourly class (if converted to hourly paid).

The cost of employer-provided benefits that are based on an employee’s wages (such as life insurance and disability insurance) will also be impacted by the decision an employer makes to address the new requirements. Salary increases given to maintain the “white collar” exemption may result in an increase in these benefit costs.

Employers need to carefully consider the total compensation impact when complying with the new overtime requirements.

Effective Date
The effective date of the final rule is December 1, 2016. Future automatic increases will occur every three years, beginning January 1, 2020.

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