Changes in U.S. Overtime Rules

The U.S. Department of Labor will be issuing new regulations in July 2016 that will bring an additional 13.5 million workers under the overtime requirements of the Fair Labor Standards Act. Labor Secretary Thomas Perez claims the new rules could add as much as $1.3 billion nationwide to workers’ pockets.

The proposed changes will more than double the salary threshold for overtime eligibility to $970 a week. This means that employees earning a yearly salary of $50,440 or less will automatically be eligible for overtime pay. Currently, the threshold for a salaried worker is $23,660 a year.

As of now, all hourly employees are automatically eligible for overtime pay. Salaried white collar workers, labeled by the U.S. Department of Labor as Executive, Administrative, and Professional Employees (EAP), are generally exempt from the requirement to pay overtime as long as they are paid at least $455 a week.

The DOL finds two major problems with the current rules. One, the salary level has not kept pace with the general increase in salaries since 2004. Additionally, employers have taken liberty with the definitions of EAP, and many workers who should not be exempt from overtime are classified as exempt. For example, under the DOL’s current rules, an administrative employee is one who exercises individual judgment or discretion in matters of significance to the company. However, administrative assistants, who do not exercise this judgment, if making more than $23,660 a year, are often classified as an exempt employee.

The DOL has decided on one solution: raise the minimum exempt salary for EAP workers. This means that when implemented, employers will have to begin paying overtime to all employees making less than $970 a week. The DOL believes salary is the only true objective measure of exempt vs. non-exempt staff, because job duties can vary so much from employer to employer. Thus, no matter what the employee’s job duties are, if the salary falls under the threshold, the employee is eligible for overtime.

Interestingly, the new overtime rules will not fix the minimum EAP exempt salary at a stated dollar amount. Rather, the minimum EAP exempt salary will be indexed at the 40th percentile of all salaries in America. The DOL will use the Bureau of Labor’s annual statistical data on salaries to reset the minimum FLSA exempt salary each year. This means that employees may be eligible for overtime one year and not the next (or vice versa) without any change in their salary.

Before the new rules take effect, employers should take advantage of the time to collect data related to each employee’s work week. By determining the work habits of employees, employers can consider the best classification for each. For example, if during the data collection period an employer sees that an employee is working an average of 47 hours a week at $42,500 a year, it may become more cost effective to raise the individual’s salary to $50,440. By increasing the salary rather than paying overtime, the employer may save money. With the DOL not issuing the rule until July 2016, employers have enough time to collect data on employee work habits and come up with a strategic, cost-effective plan to manage their employee’s salaries and overtime.