Department of Labor Issues Final Overtime Pay Regulation

Wednesday, May 18, 2016

On May 18, 2016, the Department of Labor issued its final regulation revising the overtime pay exemption for white-collar employees. It issued the proposed rule in July 2015 and, since September 2015, had reviewed over 270,000 comments from businesses, labor unions, and other members of the public about the proposed regulation.

In response to the comments, the DOL, in the final regulation, made some significant revisions from what it proposed in 2015. Those key revisions include the following:

  • The salary threshold will more than double from the current $455.00 per week ($23,660.00 per year) to $913.00 per week ($47,476.00 per year) for employees covered by the executive, administrative, and professional exemptions. The $913.00 per week threshold represents a reduction from the projected $970.00 per week ($50,440.00) that the DOL proposed in 2015. The projected $970.00 per week threshold was based on the 40th percentile of weekly earnings of all full-time salaried employees. The DOL instead opted to use the 40th percentile of full-time salaried employees in the lowest income Census region, which is the South. According to the DOL, basing “the salary threshold to the lowest-wage region of the country has strong historical precedent in previous rulemakings.” In fact, the DOL used that method when it last revised the salary threshold in 2004.
  • The DOL estimates that 4.2 million additional employees will become eligible for overtime pay as a result of the final regulation. In the 2015 proposed regulation, the DOL estimated that 4.6 million additional employees would become eligible for overtime pay as a result of the final regulation.
  • The threshold for employees covered by the “highly compensated employee” exemption will increase from $100,000.00 in total annual compensation to $134,004.00. In contrast, the 2015 proposed regulation projected an increase from $100,000.00 to $122,148.00. This larger increase in the threshold for HCE employees is not as significant as the doubling of the salary threshold for the EAP employees because of the comparatively small number of employees covered by the HCE exemption.
  • The salary thresholds for the EAP and HCE employees will be updated every three years. In the 2015 proposed regulation, the DOL had stated that the salary threshold would be updated annually. The change from updating the threshold annually to every three years is a concession by the DOL to the concerns of businesses. The first update will occur on January 1, 2020 , and the DOL will post the new salary thresholds 150 days before the effective date, which, for the first update, will be August 1, 2019. The purpose of the updates, according to the DOL, is to “ensure that workers continue to earn the pay they deserve.” The DOL projects, based on wage growth, that in 2020, the salary threshold for EAP employees will increase to $51,168.00. The DOL projects that the salary threshold for HCE employees will increase to $147,524 effective January 1, 2020.
  • The DOL, in response to employer opposition, made no changes in the “duties” test for exempt status. This decision by the DOL means that the exempt status of employees who earn more than the salary threshold will continue to be determined by using the “duties” tests that are currently in effect. The DOL noted that the “duties” test will be less important due to the increase in the salary threshold because “the higher salary threshold means more workers’ entitlement to overtime pay will be clear just from their salaries." Even so, the DOL’s retention of the current “duties” tests is an important concession by the DOL to businesses. The reason is that revising the “duties” test would have increased the number of overtime-eligible employees and resulted in more litigation about whether employees are exempt or non-exempt.
  • For the first time, non-discretionary bonuses, incentive pay, and commissions can be counted toward as much as 10% of the salary threshold for non-HCE employees, as long as the payments are made on at least a quarterly basis.
  • The final regulation will not become effective until December 1, 2016. The DOL had previously stated that the final regulation would take effect 60 days after the publication date. The December 1st effective date will provide employers with more time to prepare for the regulations and to ensure that their compensation practices comply with the regulation by December 1st.

In a May 17th communication, President Obama described the overtime pay regulation as “a step in the right direction to strengthen and secure the middle class by raising Americans’ wages.”

If you have any questions about this final regulation or the Fair Labor Standards Act, please contact the author of this Client Alert, your Butzel Long attorney, or any member of the Labor and Employment Law Group.

Gary Klotz

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