Department of Labor Issues Final Rule Updating Overtime Regulations

On May 18, 2016, President Obama announced the publication of the Department of Labor’s final rule updating the overtime regulations, which is expected to automatically extend overtime pay protections to over 4 million workers within the first year of implementation. This update will result in a boost to many workers’ overall compensation and will require employers to closely monitor the new thresholds to avoid potential liability for failure to pay overtime under the federal Fair Labor Standards Act. The effective date of the final rule is December 1, 2016.

The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt under the Fair Labor Standards Act. Specifically, the final rule:

1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
2. Sets the total annual compensation requirement for highly compensated employees subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles.

Additionally, the final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. The initial increases to the standard salary level (from $455 to $913 per week) and highly compensated employees total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.

We recommend that employers audit the salary levels for all of their exempt employees to ensure compliance with the new regulations prior to the December 1st effective date.