New Minimum Salary Requirement for Employees to be Exempt from Federal Overtime

The new expanded overtime pay rules announced by the Obama Administration May 18th mean if you are an employer with salaried employees making under $47,476 per year, you better read this.

The U.S. Department of Labor (DOL) issue a final rule that was forced out a few months early because of congressional action in the House and Senate, according to Washington insiders. Originally the DOL had planned to release the overtime pay increases during the late summer or early fall (just before the November elections), but before DOL issued the final rule, efforts were underway in the House and Senate to pass the Protecting Workplace Advancement and Opportunity Act (S. 2707, H.R. 4773), which would have required DOL to reassess the economic impact of the rule.

Instead the agency hustled a new standard for salaried employees out the door with an effective date of December 1, 2016, just in time for Christmas paychecks, if not the fall election.

Doubled Pay Ceiling in New Rule

Under existing regulations, employees earning an annual salary in excess of $23,660, and who perform qualified administrative, managerial or professional duties, are not entitled to overtime pay. While the new rule does not revise the job duties test, salaried employees earning less $47,476 will now be entitled to overtime pay if they work more than 40 hours in a week. In addition, the new rule automatically updates the salary threshold every three years to match the 40th percentile of full-time salaried employees in the lowest-wage census region in the U.S.

Employers across the country–even the Obama Administration’s own Small Business Administration Office of Advocacy–asked DOL to reexamine the impact of the proposed revisions and it appears the department listened to a certain extent: the salary basis calculation and update frequency in the final rule are different than their original plan that was so complicated nobody understood it.

Under the original proposal, the salary threshold would be determined by a national average of salaried employees’ compensation and it would be updated annually. This made it very difficult for employers to forecast staffing needs because the expense of maintaining current employees – much less hiring additional workers – would be constantly changing. Furthermore, using a national standard to determine the salary basis would disproportionally affect less-wealthy areas of the country where salaries reflect lower cost of living.

The new rule requires employers to decide how to comply with the new mandate: pay time-and-a-half for overtime work, raise employees’ salaries above the new threshold, limit the numbers of hours worked to 40 per week or execute some combination plan by December 1.

There is another option: move currently exempt employees paid a salary to an hourly wage commensurate with their annual salary and manage your overtime exposure. This might necessitate some employers hiring additional people thus still raising employee costs – and that too is exactly a desired effect by the Obama Administration from this revised rule.

If you haven’t received the information already, the DOL provides extensive guidance for employers at https://www.dol.gov/whd/overtime/final2016/ .

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