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New Federal Overtime Rule is a Boon to Employees, a Potential Minefield For Their Employers

May 26, 2016

The U.S. Department of Labor (DOL) announced on May 18 its final, long-awaited revisions of the rules that govern the salary cutoff for the "white collar" overtime exemption under the Fair Labor Standards Act (FLSA). The changes are dramatic; their effects will be widespread and difficult for many employers to navigate. It is important that employers begin to prepare as soon as possible.

Set to take effect on December 1, 2016, the new rule will raise the annual salary cutoff for FLSA exemptions to $47,476 per year ($913 per week), more than double the current $23,660 ($455 per week) threshold. In just its first year, it will extend overtime protections to more than 4.2 million additional workers who will no longer fall under the FLSA's exemptions for executive, administrative, professional, outside sales and computer employees. What's more, the new overtime rates will not remain static for long. The DOL has announced it will review the salary threshold every three years to make sure it keeps pace with inflation. The first update is scheduled for January 1, 2020, at which point the threshold is expected to rise to $51,168.

Among its other provisions, the new rule also raises the salary threshold for exemption as a "highly compensated employee" to $134,004 per year from $100,000. In a change that stands to benefit employers, bonuses and commissions can for the first time be used to satisfy as much as 10 percent of a non-highly compensated employee's salary, although certain restrictions apply. The long-standing "duties test" used to determine overtime eligibility for workers compensated above the new threshold rate remains unchanged.

Implications: A Challenge for Employers

Employers have until the end of November 2016 to prepare for the dramatic change. It's important they start as soon as possible, beginning with an audit of their workforce to determine the extent to which they may be affected.

To ensure their continued compliance with the FLSA, employers of every size must now analyze the employment status of employees who were once exempt, but who are now paid below the new salary threshold. They will then face a hard choice: whether to (1) reclassify their newly non-exempt employees, and commit to either paying them time-and-a-half for overtime or limiting their hours to 40 per week; or (2) raise individual employee salaries to a level above the new, substantially higher level -- increases that stand to run into the five figures for each affected employee. There may be no perfect option, as either decision will bring employers higher costs. Beyond that, employers will likely be forced to deal with difficult interpersonal workplace issues, as many entry- and lower-level managers may suddenly be paid on a par with those they supervise.

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Drogin, Laurent S. Partner Partner 212.216.8016 VCard
Hershberg, Jonathan S. Associate Associate 212.216.8009 VCard