Since 2014, the U.S. Department of Labor has been working to revise the Fair Labor Standards Act’s guidelines on which employees receive overtime pay. President Obama set a goal of ensuring all workers are fairly paid for the work they perform nearly two years ago, and on May 18, 2016, the Department published its final rule on overtime exemptions.
What is the Fair Labor Standards Act?
The FLSA (Fair Labor Standards Act) is the law that establishes a federal minimum wage for most employees in the U.S. It also requires employees to be paid for all the hours they work and to receive overtime pay, equal to one and a half times their regular pay rate, when they work more than 40 hours during a work week.
What is Overtime Exemption?
This is the key area addressed by the Department of Labor’s Final Rule. The FLSA’s Section 13(a)(1) states that employees who meet certain criteria for job duties, payment method (salary) and pay rate are exempt from both the overtime pay and minimum wage requirements. These are referred to as “white collar” exemptions. It’s important to note that being paid as a salaried employee does not alone make an employee exempt from overtime.
What are White Collar Overtime Exemptions?
White collar exemptions are not determined by a job title or salary; an employee must meet a salary basis test, a salary level test and a duties test.
- The salary basis test simply means workers must receive a salary instead of an hourly rate of pay.
- The salary level test is the standard salary level employees must receive if they are exempt from overtime pay. This is not a minimum wage requirement for all salaried employees, and an employer isn’t required to pay workers the required salary unless the employer claims a white collar exemption.
- The duties test is a list of job duties established by the FLSA to determine whether employees have job functions that qualify them for overtime exemption as executive, professional or administrative workers.
What’s Changing under the Final Rule?
Under the Final Rule’s new regulations, more than 4 million white collar workers will receive overtime pay protection and a minimum wage.
- New salary threshold of $913 per week (previously $455) or $47,476 per year (previously $23,660). This new standard equals the 40th percentile earned by full-time salaried employees in the U.S. Census South Region, which is currently the lowest-wage Region.
- New highly compensated employees’ (HCE) total annual compensation requirement of $134,004 (previously $100,000). This rate equals the national 90th percentile annual earnings of full-time salaried employees. Workers must also meet a minimum duties test.
- Establishes automatic salary threshold and compensation increases every three years, starting January 1, 2020, to ensure they continue to meet the correct percentiles.
- Revised the salary basis test so employers may apply both non-discretionary bonuses and incentive payments, such as commissions, toward up to 10% of the new standard salary, as long as the bonuses are paid on a quarterly basis.
The effective date for the final rule’s standard salary and HCE total annual compensation requirement is December 1, 2016.