A new federal law which goes into effect on Dec. 1st could potentially affect millions of workers across the U.S.
If you’re currently working in a salaried position making less than $47,476 per year new overtime regulations going into effect may change the numbers on your weekly paycheck.
As the rules currently work, companies can avoid paying overtime to full-time salaried employees making as little as $23,660 by classifying them as “exempt.” Those workers aren’t entitled to overtime pay even if they work more than 40 hours a week.
The law that goes into effect on Dec. 1 changes that. The White House said the 40-hour workweek has eroded over the years, with workers putting in more hours without being compensated for them. According to updated regulations released by the Department of Labor, more than 4.2 million Americans who were previously considered “exempt” will now be eligible to receive overtime pay for any hours over 40 worked in a week.
Businesses have been scrambling to prepare for the onset of the Fair Labor Standards Act.
What does it mean for them? They’ll have to anticipate higher payroll costs, either by paying out more in overtime or raising the salaries of employees so they hit the $47,500 threshold to become exempt employees. Companies could also make changes to paid time off, bonuses and incentive plans to compensate.
The regulations about double to $913 a week from $455 the threshold under which salaried workers must be paid overtime. But there won’t be a blanket increase for all workers whose pay falls below the new threshold. There are still a few exempt positions, such as doctors, lawyers, teachers, police officers, computer programmers, office workers and first responders, but the majority of Americans will be covered by the new provision. And unlike laws that make exceptions for small businesses, this new regulation is not dependent upon your company’s size.
While the new regulation is slated to go into effect on Dec. 1, 2016, there are a coalition of states and business groups currently suing the government to push this date back and allow companies to phase in the regulations. The attorneys general from 21 states have sued the Department of Labor (DOL) to stop the change and are asking a judge to stop the rule from taking effect until the case is decided. This is the first update to rules governing overtime since 2004. The new rule also includes a provision in which the salary minimum point will be automatically updated every three years, “based on wage growth over time.”
Nevada’s one of the original litigants the case. Nevada Solicitor General Lawrence Van Dyke said the change is nothing more than an edict from the feds on how to run a state.
“The federal government’s saying, ‘You got to spend more money on payroll costs’…where’s that money going to come from? It’s got to come from raised taxes or cuts to other programs,” he said. “It’s an intrusion into the self-governance of states and also into state sovereignty.”
Illinois Attorney General Lisa Madigan is not participating in the lawsuit.
Information obtained from the Illinois comptroller’s Office indicates that nearly 9,800 salaried state employees could be eligible for overtime starting Dec. 1, barring any exemptions.
A representative from Illinois State University said it is expecting up to $2.2 million in new annual costs to get the pay of approximately 275 eligible employees into compliance.
A spokeswoman from the University of Illinois said it plans to spend up to $3 million on employee raises this month to get its workers’ pay into compliance.
The Department of Labor estimates that 193,930 workers in Illinois would be affected by the new threshold.
So how will the new overtime law affect you?
Before you go adding gifts to your holiday shopping list, you should know that there are a number of ways that your employer could handle this, and not all of them will add dollars to your bottom line.
Your employer can pay you overtime. This is the most straightforward approach to the new regulation. If you currently make less than $47,476 per year, your employer may opt to simply pay you overtime for any hours you work over 40 each week. If you regularly work overtime, this will mean more money in your paycheck.
Your employer can raise your salary. If your salary is close to the minimum threshold, your employer may opt to raise it above that amount, thereby making you exempt from overtime. You won’t earn any overtime, but you will get a pay bump to compensate.
Your employer can limit your hours. Employers may decide to control costs by keeping a close eye on hours worked to make sure that their employees don’t go over 40 hours each week. This may involve hiring more part-time staff or redistributing duties so that the same amount of work can get done without anyone receiving overtime. You won’t see any extra dough, but you might have some extra time on your hands if you no longer need to work more than 40 hours a week.
Your employer can change your salary. It’s a bit of a workaround, but your employer may opt to change your salary and make your hourly pay lower, therefore covering the cost of any potential overtime that you may earn. You won’t make any extra money and will likely work the same number of hours that you did before.
If you’re not sure how your company plans to handle the new overtime regulation, it’s worth asking — especially before you start making that holiday shopping list.
Here are some other points regarding overtime.
1. Q. What is the purpose of the “Overtime” Final Rule?
This Final Rule updates the regulations for determining whether white collar salaried employees are exempt from the Fair Labor Standards Act’s minimum wage and overtime pay protections. They are exempt if they are employed in a bona fide executive, administrative, or professional capacity, as those terms are defined in the Department of Labor’s regulations at 29 CFR part 541. This exemption from the FLSA is sometimes referred to as the “white collar” or “EAP” exemption.
2. Q. What is “overtime”?
Unless specifically exempted, employees covered by the FLSA must receive pay for hours worked in excess of 40 in a workweek at a rate not less than one and one-half their regular rates of pay. This is referred to as “overtime” pay.
3. Q. What determines if an employee falls within one of the white collar exemptions?
To qualify for exemption, a white collar employee generally must:
- be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
- be paid more than a specified weekly salary level, which is $913 per week (the equivalent of $47,476 annually for a full-year worker) under this Final Rule (the “salary level test”); and
- primarily perform executive, administrative, or professional duties, as defined in the Department’s regulations (the “duties test”).
Certain employees are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers). The Department’s regulations also provide an exemption for certain highly compensated employees (“HCE”) who earn above a higher total annual compensation level ($134,004 under this Final Rule) and satisfy a minimal duties test.
4. Q. Why is the Department revising its overtime regulations for white collar workers now?
On March 13, 2014, President Obama signed a Presidential Memorandum directing the Department to update and modernize the regulations defining which white collar workers are protected by the FLSA’s minimum wage and overtime standards. The salary level test is supposed to help identify salaried workers who are entitled to overtime pay when they work long hours. The current salary level is outdated and no longer does its job of helping to separate salaried white collar employees who should get overtime pay for working extra hours from those who should be exempt. Through this Final Rule, the Department is updating these regulations to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-eligible workers, thus making the exemption easier for employers and workers to understand and apply. These revisions will also help ensure that in the future the regulations continue to appropriately separate workers who are entitled to overtime protections and those who may be exempt.
5. Q. When did the Department last revise its overtime regulations for white collar workers?
The Department last updated the white collar overtime regulations in 2004. That update set the standard salary level at $455 per week ($23,660 annually for a full-year worker).
6. Q. What are the significant changes to the overtime regulations for white collar salaried workers?
To restore the effectiveness of the salary level test, the Department is setting the new standard salary level equal to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region, currently the South. The Final Rule increases the standard salary level from $455 per week ($23,660 for a full-year worker) to $913 per week ($47,476 for a full-year worker).
In order to prevent the salary level requirements from again becoming outdated and ineffective, the Department is establishing mechanisms for automatically updating the salary and compensation levels every three years to maintain them at the levels set in this rulemaking.
Finally, for the first time, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level, provided these payments are made on a quarterly or more frequent basis.
The Department is also setting the annual compensation level for certain HCEs equal to the annualized value of the 90th percentile of earnings for full-time salaried workers nationally ($134,004).
7. Q. How does the final rule differ from the NPRM?
After considering the public comments, the Department made several key changes to the proposed rule.
- First, the Final Rule sets the standard salary level equal to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, rather than based on national data as proposed. The Department modified the standard salary level in response to commenters’ concerns that the proposed rule did not adequately account for the lower salaries paid in certain regions.
- Second, the Final Rule provides for automatic updates of the salary levels every three years rather than for annual updates as proposed. The Department made this change in response to commenters’ concerns about the burdens associated with updating the salary level on an annual basis.
- Third, the Final Rule permits employers to count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the required salary level for the standard exemption, so long as employers pay those amounts on a quarterly or more frequent basis. In the proposal, the Department said it was considering permitting nondiscretionary bonuses, incentives, and commissions to count toward 10 percent of the salary level, but only if employers paid them on a monthly or more frequent basis. The Final Rule also allows employers to make a “catch-up” payment at the end of each quarter.
8. Q. How do the current regulations, proposed rule and final rule compare?
|blank||Current regulations (2004 until effective date of Final Rule, 2016)||NPRM||Final Rule|
|Salary Level||$455 weekly||$970 weekly (if finalized as proposed)
40th percentile of full-time salaried workers nationally.
40th percentile of full-time salaried workers in the lowest-wage Census region (currently the South)
|HCE Total Annual Compensation Level||$100,000 annually||$122,148
90th percentile of full-time salaried workers nationally
90th percentile of full-time salaried workers nationally
|Automatic Adjusting||None||Annually, with requests for comment on a CPI or percentile basis||Every 3 years, maintaining the standard salary level at the 40th percentile of full-time salaried workers in the lowest-wage Census region, and the HCE total annual compensation level at the 90th percentile of full-time salaried workers nationally.|
|Bonuses||No provision to count nondiscretionary bonuses and commissions toward the standard salary level||Request for comment on counting nondiscretionary bonuses and commissions toward standard salary level||Up to 10% of standard salary level can come from non-discretionary bonuses, incentive payments, and commissions, paid at least quarterly.|
|Standard Duties Test||See WHD Fact Sheet #17A for a description of EAP duties.||No specific changes proposed to the standard duties test. Request for comment on whether the duties tests are working as intended.||No changes to the standard duties test.|
9. Q. How will employers implement the updated salary level requirement established in this Final Rule?
Employers have a range of options for responding to the updated standard salary level. For each affected employee newly entitled to overtime pay, employers may:
- increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
- pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked;
- reduce or eliminate overtime hours;
- reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
- use some combination of these responses.
The circumstances of each affected employee will likely impact how employers respond to this Final Rule. For example, employers may be more likely to give raises to employees who regularly work overtime and earn slightly below the new standard salary level, in order to maintain their overtime-exempt status so that the employer does not have to pay the overtime premium. For employees who rarely or almost never work overtime hours, employers may simply choose to pay the overtime premium whenever necessary. The Department accounted for these (and other) possible employer responses in estimating the likely costs, benefits, and transfers of the Final Rule.
Nothing in the rule requires employers to change employees’ pay to hourly from salaried, even if the employees’ classification changes from exempt to overtime eligible. Employers may choose options #2-#4 above while continuing to pay newly overtime eligible employees on a salaried basis.
10. Q. When will these changes take effect?
The effective date of this Final Rule is December 1, 2016. On that day, the new standard salary level ($913 per week or $47,476 per year) and HCE total compensation requirement ($134,004 per year) will take effect. Future automatic updates to these thresholds will occur every three years, beginning on January 1, 2020.
Again, if you’re not sure how your company plans to handle the new overtime regulation, it’s worth asking.