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Compensation Sense: New Department of Labor Overtime Rules Extend Protections to Millions More Workers

May 19, 2016
FLSA Overtime Rules | Total Reward Solutions | Indianapolis

IMPORTANT UPDATE: On Tuesday, November 22, 2016, a U.S. District Judge suspended the December 1, 2016 implementation date of overtime rule changes in the Fair Labor Standards Act. While many businesses may be breathing a sigh of relief because they were in danger of non-compliance, the judge’s order may be merely a temporary reprieve. CLICK HERE to learn more.

On Wednesday, May 18, 2016, the United States Department of Labor released final regulatory changes to overtime rules in the Fair Labor Standards Act (FLSA). Those changes – which become effective December 1, 2016 – extend overtime compensation to more than 4 million U.S. workers who were not previously eligible for overtime pay. Here are some of the key changes that will affect employers under the new regulations:

A New Threshold for Inclusion

Currently, full-time employees classified as executive, administrative or professional (EAP) are exempt from being paid time-and-a-half their base salary for hours worked over 40 per week if they earn at least $455 per week (the equivalent of $23,660 per year). The new rules, however, increase this threshold to $913 per week ($47,476 per year). Thus, the new regulations directly affect any EAP employee who currently earns a salary greater than $23,660 per year but less than $47,476 per year.

Automatic Increases to the Threshold

The threshold for affected worker compensation will be adjusted every 3 years to maintain the level at the 40th percentile of full-time salaried workers in the lowest-wage Census region. It is not affected by industry variables, nor by economic conditions, nationally or regionally. The Society for Human Resource Management (SHRM) projects that the salary threshold will likely rise to more than $51,000 with its first update on January 1, 2020.

Duties Test Does Not Change

The “duties test” also used to determine inclusion or exemption from overtime rules was not changed in the new regulation.

Highly-Compensated Employee (HCE) Exemption Increases

The new final rule retains the methodology in the proposed rule setting the threshold at the 90th percentile of full-time salaried workers nationally. Thus, the exemption for HCEs now applies to employees earning at least $134,004 per year.

Effective Date of Overtime Rules Give Employers More Time to Prepare

Lobbying by industry experts and groups such as SHRM resulted in the effective date for the new ruling being pushed back to December 1, 2016. This will allow HR professionals to review their current workforces immediately to determine which employees are affected, and then decide whether to re-classify those employees.

FLSA Exemptions, Classifications and Typical Employer Errors

As before, the “exemption test” consists of two parts. Employees must meet the salary test and the job duties test. Employers cannot classify employees as exempt just because they pass the salary test if they do not also pass the job duties test.

At Total Reward Solutions, we often find companies have trouble in two key areas:

  1. Misclassification of part-time employees. In order to be considered for exemption, part-time employees must meet the weekly salary test just as full-time employees do. There is no annualizing of part-time employee pay in order to satisfy the salary test.
  2. Companies misunderstand – and therefore, may incorrectly apply, the administrative exemption in the exemption test. This portion of the FLSA is somewhat ambiguous and may not cover employees doing administrative work in the way companies often believe.

We often find other common misclassifications due to these mistakes:

  • Automatically classifying Administrative Assistants as exempt because the word “administrative” is in the title
  • Erroneously believing that any employee engaged with computer systems is exempt
  • Falsely assuming that a Bachelor’s degree requirement automatically qualifies the position status as exempt
  • Mistakenly classifying all sales roles as exempt
  • Automatically classifying management trainees or interns as exempt

The Bottom Line

The new FLSA overtime standards will likely mean significant wage increases for millions of Americans. For the employer, however, these regulatory changes create new compliance hurdles and mean that hard decisions must be made to manage overall compensation policies and costs. As always, Total Rewards Solutions stands ready to help employers understand the new regulatory changes and how they impact employee compensation and rewards programs. To learn more, contact us today at 317.589.8529.

Cassandra Faurote

About Total Reward Solutions:

Total Reward Solutions is your outsourced compensation services provider, dedicated to innovating total rewards that drive people and business excellence. Led by respected and professionally certified Human Resources expert Cassandra Faurote, Total Reward Solutions offers a broad range of compensation, benefits, performance management, and reward/recognition consulting services to help your organization attract top talent, motivate employees and retain top performers. Call us today at 317.589.8529 to discuss how we can help your organization develop and implement competitive and effective compensation and total reward programs.


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