Employment Law Alert

Are You Ready to Reclassify? New Overtime Regulations Go Into Effect on December 1, 2016

October 5, 2016

On December 1, 2016, any employees who earn less than $47,476 annually will be entitled to overtime and must be treated as non-exempt, as per the U.S. Department of Labor’s final rule (“Final Rule”). Don’t wait any longer to address this critical change in the law.

Do you have any exempt employees who earn less than $913.00 per week ($47,476 annually)?  If so, as of December 1, they will need to be reclassified as non-exempt and paid overtime, according to the U.S. Department of Labor’s final rule (“Final Rule”) which updates the overtime regulations.  Employers need to take action now to determine what approach to take to address this issue, including determining which employees will be affected, whether changes can be made to their compensation to retain their exempt status, alerting employees to the upcoming change, and training supervisors and payroll staff on how to process overtime payment.  Care must be taken to avoid liability and insure compliance with the rules regarding compensatory time and overtime pay.

Changes to the FLSA

The federal Fair Labor Standards Act (“FLSA”) “white collar” exemptions are familiar to most employers.  Under the FLSA, employees must be paid the minimum amount required by the statute on a salary basis, and the employee’s job duties must primarily involve executive, administrative, or professional duties.  The Final Rule changes only the salary basis test, leaving in place the existing duties test.

Salary Basis Test

President Obama has hailed the Final Rule, which amends 29 CFR Part 541, as “a step in the right direction to strengthen and secure the middle class by raising Americans’ wages.”  The most significant part of the Final Rule is the change in the salary and compensation levels needed to qualify for exemption from overtime.  With this change, the standard salary level has been set at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, which is $913.00 per week, or $47,476 annually.  This is more than double the current salary level (currently the required salary is $455.00 per week ($23,660 annually)) and is predicted to result in extending overtime pay protection to over 4 million workers.

What this means for employers is that if you have any exempt employees who earn less than $47,476 per year, then pursuant to the Final Rule, those employees will need to be reclassified as non-exempt and paid overtime (time and a half) for all hours worked over 40 in a week, as of December 1, 2016.

Use of Bonuses and Incentive Payments

Importantly, the Final Rule now allows employers use to nondiscretionary bonuses and incentive payments (including commissions) to fulfill up to 10 percent of the standard salary level.  In order to credit such payments toward the salary basis test, however, the payments must be made on a quarterly or more frequent basis.  If an employee does not earn enough in bonuses in a given quarter to retain exempt status, the Final Rule permits the employer to make a “catch-up” payment at the end of the quarter; the employer has one pay period to make up for the shortfall, and such payment will only count toward the prior quarter's salary amount and not toward the salary amount in the quarter in which it was paid. If the employer chooses not to make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the quarter.

Highly Compensated Exemption

Highly compensated employees may qualify for exemption from overtime if they meet a higher salary standard and a minimal duties test.  The Final Rule raises the compensation requirement for highly compensated workers to $134,004 (from $100,000).  The new rate is measured by the 90th percentile of earnings of full-time salaried workers nationally.  Highly compensated workers must still receive at least the same weekly salary rate (which is now $913.00) as other exempt workers, as well as meet the less stringent duties test.  As before, the remainder of the annual compensation amount may come from nondiscretionary bonuses and incentive payments (including commissions).

Automatic Updating

The Final Rule provides for a mechanism to automatically update the salary and compensation levels every three years in keeping with the measures adopted in the Final Rule:  the standard salary level will be maintained at the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage census region, and the annual compensation level for highly compensated workers will be maintained at the annual equivalent of the 90th percentile of earnings of full-time salaried workers nationwide.

Consequences

As noted, any exempt employee earning less than $47,476 per year will need to be reclassified as non-exempt and paid overtime for all hours worked over 40 in a week, as of December 1, 2016; employers will need to put systems into place to record employee hours worked and calculate overtime accordingly.  Failure to reclassify an employee will result in liability for unpaid overtime, as well as treble damages and attorney’s fees under the Massachusetts Wage Act and similar penalties under other state laws.  Additionally, the new salary requirement will make it more difficult to keep part-time exempt positions in place, as those positions will still need to meet the $913.00 per week salary minimum.  Employees who are unused to being paid on an hourly basis may have questions about how their wages will be paid, and may not be pleased about the changes in recordkeeping and the uncertainty which may come with a switch to an hourly wage.

If you have not yet considered the effect of this change on your workplace, there is still time.  Contact Scott Connolly for more information on how the Final Rule will affect your current employee classifications and pay practices, and what you will need to do before December 1 to comply with the law.

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