As you may already know, the U.S. Department of Labor (“DOL”) is seeking to change the rules on overtime pay for executive, administrative, and professional employees. The regulations at issue were last updated in 2004, so they are probably overdue for one, but as explained below, the proposed changes will have a huge impact on how businesses pay their employees.
What do the regulations currently require?
The default rule is that employers are required to pay 1.5 times the regular hourly rate to employees for every hour worked over the standard forty-hour work week. However, like any rule, there are exceptions. Certain executive employees, administrative employees, professional employees, and IT employees may be “exempt” from the FLSA’s overtime requirements, but only if they make a weekly salary of greater than $455.
An exception for highly compensated employees also exists. Employees who perform non-manual work, customarily perform at least one of the duties of an otherwise exempt employee, and receive annual compensation of $100,000 or more are not entitled to overtime pay.
For quite some time now, rumors have been circulating that these salary thresholds will be raised, and it looks like we may now be on the eve of that change. Here’s what you can expect.
What changes is the DOL proposing?
The proposed changes to the current minimum wage and overtime pay protection regulations include:
- The weekly salary threshold more than doubles. The regulation will change the amount an employee must make before being characterized as an exempt employee from the current fixed rate of $455 per week to a fluctuating amount based on the 40th percentile of weekly earnings for full-time, salaried workers (currently approximately $970 per week);
- $100,000 isn’t as much money as it used to be. The regulation will change the amount an employee must make before being characterized as a highly compensated exempt employee from $100,000 annual compensation to a fluctuating amount based on the 90th percentile of weekly earnings of full-time, salaried workers (which is currently $122,148 annually); and
- Establishing a mechanism for automatic annual adjustment in accordance with the Consumer Price Index. Using the CPI allows for automatic annual adjustment rather than requiring a new rule for each threshold increase.
When will the new regulations go into effect?
The DOL submitted its final regulation to the Office of Information and Regulatory Affairs (“OIRA”) on March 14, 2016. Technically, OIRA has up to 90 days (or June 12, 2016) to review the final rule; however, the review is expected to take less time. After OIRA’s review, the final rule will be published in the Federal Register, and employers will have at least 60 days to comply with the new regulations. In order to avoid the potential of annulment by the next administration, the regulation must be published in the Federal Register by May 16, 2016, which would likely make the new overtime rules effective for employers sometime in July of 2016.
Why is May 16th significant?
If the regulation is passed by OIRA and published in the Federal Register prior to May 16, 2016, the regulation will stand unless Congress votes to overturn it. However, the Congressional Review Act (“CRA”) provides that, in an election year, agencies only have a certain amount of time to publish new regulations for consideration by the current administration. The CRA requires that this rule be published in the Federal Register before May 16, 2016, to be subject only to the current administration’s approval. If the regulation is published after May 16, 2016, the CRA would allow the soon-to-be elected legislature a chance to reject the bill in 2017, leaving employers uncertain as to their obligations.
What does this mean for your business?
The reality is that, very soon, many employees who are currently classified as exempt will no longer meet the salary threshold for that classification. For those employees, employers will need to track hours and, when warranted, pay overtime. These changes appear imminent, so employers are well advised to start planning now.
 According to the DOL’s Fact Sheet on the new rule, available here.