On May 18, 2016, the Department of Labor (“DOL”) issued a final rule on overtime exemption likely to impact more than 4 million American workers and their employers. The DOL doubled the salary “white collar” employees must earn to be exempt from overtime and minimum wage requirements, raising the threshold from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). The final rule also raises the exemption threshold for “highly compensated employees,” who are still subject to a more minimal duties test, from $100,000 to $134,004 annually.

This dramatic shift is estimated to increase overtime wages by $10 billion over 10 years and likely has some employers as concerned as worker advocates are elated.

So what does this final rule mean to affected employers, and how can they prepare for the changes set to take effect on December 1, 2016?

For employers to establish that an employee is exempt from overtime requirements under the “white collar exemption,” three criteria must be satisfied:

  1. The employee must be paid on a salary (not hourly) basis not subject to reduction based on quality or quantity of work;
  2. The employee must be paid at least $913 per week or $47,476 annually (the new “Salary Level Test”); and
  3. The employee’s primary job duty must involve the kind of work that qualifies as exempt, that is, they are employed in a bona fide executive, administrative, professional or computer position, as defined by the regulations.

The final rule issued by the DOL only modifies the Salary Level Test above; the other two criteria are unchanged.

In applying the above criteria, employers must remember that neither job title alone nor receiving a salary in excess of the established thresholds is sufficient to establish that an employee is exempt from overtime pay. All three of the criteria must be met to establish the exemption. Employers may be pleased to learn, however, that under the new rule up to 10% of an employee’s annual bonuses and/or commission can now be counted toward meeting the salary thresholds to establish exemption, so long as such bonuses and/or commissions are paid at least on a quarterly basis. In addition, if an employee does not earn enough in non-discretionary bonuses or incentive payments (including commissions) in a quarter to retain the salary level for exempt status, an employer may provide a “catch up” payment at the end of the quarter.

Affected employers may need to make some important choices in order to comply with the new rule: accept the change and begin paying overtime wages to formerly exempt workers for hours in excess of 40 per week; raise salaries to maintain current overtime exemptions; decrease wages to meet budgetary needs in light of increased overtime costs; or reorganize workloads, adjust worker schedules, and potentially hire more employees to spread out work and keep each employee’s workweek under 40 hours.

It is imperative that employers proactively assess prior to December 1, 2016 the current pay, job duties, scheduling, and work-hour tracking practices to fully determine the impact the DOL’s new rule will have on their bottom line and on their employees. Employers should review and revise their overtime policies to provide close management of actual hours worked. Furthermore, job descriptions versus actual job duties performed should be reviewed as well to ensure executive, administrative, and professional work is performed by workers who are classified as exempt.  By taking such proactive steps now, employers may minimize the impact of the new overtime rules.  The new rules also mandate automatic increases to the salary threshold every three years.

If you have any questions regarding the new rules, please contact Laura Pfeiffer at 612.604.6685, lpfeiffer@winthrop.com or Mark Pihart at 612.604.6623, mpihart@winthrop.com.

May 27, 2016