Overtime Rule Change Takes Effect Dec. 1

Businesses must evaluate job classifications in light of Department of Labor's new rule on the white collar exemption and overtime pay obligations.
By Megan Erickson Moritz | September 13, 2016

Recently, the Department of Labor adopted its long-awaited final rule regarding who is exempt from overtime pay under the executive, administrative and professional exemptions—i.e., the so-called “white collar” or “EAP” exemptions. This new rule takes effect Dec. 1 and could impact exemption classifications and overtime pay obligations at your plant. 

In July 2015, the Department of Labor issued its notice of proposed rulemaking (NPRM), which outlined its original proposal for the changes to these regulations. The agency then accepted public comment on its proposal through Sept. 4, 2015. The Department of Labor received nearly 300,000 public comments. Despite expressed opposition from many, the Department of Labor went forward with much of its original proposal in the final rule. Here is a summary of some of the basic terms of the revised regulations:

Salary Level:  Current regulations set the salary level at $455 a week ($26,600 per year), which was established to exclude the lowest 20th percentile of the country’s lowest-wage region and lowest-wage industry. The NPRM proposed raising the threshold to $970 a week ($50,440 per year), which was the 40th percentile of full-time nonhourly workers on a national basis, without regard to regional differences. The final rule keeps the 40th percentile measure proposed in the NPRM, but looks to the 40th percentile of full-time salaried workers in the lowest-wage census region (currently, the South), which results in a salary level of $913 a week ($47,476 per year).

Highly Compensated Employees:  Current regulations establish a salary level for the HCE exemption at $100,000 annually. The NPRM proposed a new level of $122,148, based on the 90th percentile of full-time nonhourly workers nationally. The final rule uses the same 90th percentile of full-time nonhourly workers on a national basis as was proposed in the NPRM, which since has gone up to $134,404 annually.

Automatic Adjustments: Current regulations do not require periodic or automatic adjustments to the salary level. The NPRM proposed incorporating a mechanism to recalculate a new salary level annually, based either on a fixed percentile of Bureau of Labor Statistics earnings data or using the Consumer Price Index. The final rule does require regular, periodic updates to maintain the salary level at the 40th percentile of full-time salaried workers in the lowest-wage census region (and HCE comp at the 90th percentile nationally), but calls for updates every three years, rather than annually.

Bonuses: Current regulations do not allow any portion of nondiscretionary bonuses or commissions to count toward the salary level requirement. The NPRM indicated it would consider whether it might allow some portion of bonuses to count toward the requirement, but did not give specific proposed language. The final rule allows up to 10 percent of certain nondiscretionary bonuses, incentive payments and commissions (as long as they are paid at least quarterly) to count toward the required salary level.

Duties Tests: Current regulations impose a duties test in addition to the salary level and salary basis requirements for each exemption. The NPRM suggested the agency was considering significant changes to the duties tests, but the Department of Labor proposed no specific regulatory language and offered few details regarding the changes being contemplated. The Final Rule makes no changes to the standard duties tests. 

After the rule goes into effect Dec.1, the automatic updates to the salary thresholds will occur every three years, beginning Jan. 1, 2020. Because reclassification can take months to properly complete, employers should be working with legal counsel to review exemption classifications and consider whether reclassifications or other internal changes are necessary for compliance.

In addition to the updated white collar exemptions likely to affect many employers, the U.S. Department of Labor has been cracking down on other overtime pay violations, including failure to pay additional overtime due on performance- and production-based bonus awards and other incentive payments made to nonexempt employees. The agency also has been ramping up enforcement efforts regarding misclassification of employees as independent contractors. The additional oversight from the Department of Labor requires companies to be vigilant about their wage and hour administration.


Author: Megan Erickson Moritz
Attorney, BrownWinick Law Firm