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The New Overtime Rule: What It Requires, Whom It Affects

Tuesday June 28th, 2016

Estimated time to read: 2 minutes

The Labor Department’s new overtime rule—released in May and scheduled to take effect on Dec. 1—extends the Fair Labor Standards Act’s protections to most salaried workers who earn less than $47,476 a year ($913 a week). The move will expand FLSA coverage to an estimated 4.2 million workers who earn between the current exemption threshold and the new threshold.

Overtime is regulated by the FLSA, which categorizes workers as either exempt or nonexempt. Under current rules, the standard salary level required for an executive, administrative or professional employee to qualify for the overtime exemption is $23,660 a year ($455 a week). Those earning below the current threshold are classified as nonexempt and thus are covered under the law. These workers must be paid a rate that is at least equal to the federal minimum wage ($7.25) and are entitled to overtime pay equal to time-and-a-half their regular rate if they work more than 40 hours in a workweek. The new rule does not change the executive, administrative or professional duties requirement.

The salary threshold will be updated every three years, starting Jan. 1, 2020, based on the 40th percentile of full-time salaried workers in the lowest-income census region in the U.S.

Implementation Concerns

Employers cannot opt out of complying with this new rule. So, between now and Dec. 1, they must figure out the changes they need to make to ensure their workers are covered.

Perhaps most importantly, employers should review their current classifications for their workers and determine who can be reclassified as exempt or nonexempt.

Some options for employers to limit the potential increase in overheard costs include: switching workers to hourly status to better track hours, limiting workers’ hours to 40 per week, or giving a raise to workers who are just below the $47,476 threshold so they are exempt and not entitled to overtime.

The new rule allows employers to include bonuses and incentive payments of up to 10 percent of the new salary threshold—viewed by some as a favor to employers from the Labor Department. However, the bonuses must be paid to workers on a quarterly basis. For employers that traditionally pay bonuses on an annual basis, they should decide if they want to change their bonus structure. The department has yet to provide guidance on what will happen if an eligible employee is terminated or quits before a quarterly bonus is paid.

Employers should make sure they are continuously communicating with their workers about the steps that must be taken to ensure compliance with the rule’s requirements and how the rule affects them. This is especially important for reclassified employees. For example, once-exempt employees who are reclassified to nonexempt will have to learn how to request overtime pay when they are accustomed to working without asking for permission.

Opposition From Republicans, Business Lobbyists

While employers prepare their business for the new overtime rule, Republicans have come out strongly against it, saying it negatively impacts small businesses, universities and nonprofits. Several senators have offered amendments to the DOL funding bill to stop the overtime rule, or want the department to conduct more economic analysis before implementing the new salary threshold. Business lobbyists have shown their support for any Republican proposal that will stop the rule from taking effect.

However, any bill or amendment that could potentially reach the President’s desk will most likely be vetoed, as he refers to the rule as “the single biggest step I can take through executive action to raise wages for the American people.”