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Changes to overtime pay rules are coming

April 7, 2016 Article 2 min read
The Department of Labor is expected to modify rules for salaried "white collar" workers. Here's our summary of the proposed changes.

The Department of Labor (“DOL”) is expected to issue final regulations in early July 2016 modifying the current Fair Labor Standards Act (“FLSA”) overtime rules for salaried “white-collar” workers.

What is changing?

Salaried employees that perform certain duties, such as executive, administrative, and professional employees, are referred to as white- collar employees and may be exempt from the FLSA overtime pay requirements. Whether a white-collar employee is exempt from the overtime pay rules depends on the employee’s salary level. Under current rules, white-collar employees that earn a salary of at least $455 per week ($23,660 per year) are exempt from the overtime pay rules. The final overtime regulations are expected to increase the minimum salary level from $455 to $970 per week ($50,440 annually). This means that any white-collar employees making less than $50,440 a year will generally be entitled to be paid overtime, regardless of job duties.

It is important to point out that certain professionals, such teachers and licensed, practicing doctors and lawyers are exempt from overtime pay.In addition to the increase, the salary level is expected to adjust (presumably up) annually, which is a departure from current rules. The salary level of $50,440 is the 40th percentile of weekly earnings for full-time salaried workers. The proposed regulations include two possible methods for calculating annual increases. The first ties the salary level to the 40th percentile of earnings for full-time salaried workers, and the second updates the annual salary level based on changes in inflation. It is unclear at this point which method the final regulations will adopt.

Who will be affected?

This is a major policy shift and the first update to the regulations since 2004; the FLSA regulations have only been modified seven times (including this proposed change) since 1938. The DOL estimates the change will impact nearly 4.6 million workers. We expect the change will impact nearly all industries, but that the largest impact will be on nonprofit organizations, retail, restaurants, marketing, engineering, accounting, and architecture. The proposed regulations could impact employers, affecting:

  • Overtime costs
  • Payroll system updates
  • Revision of current hourly rates for employees in order to keep total compensation costs stable
  • Training for re-classified nonexempt employees for timekeeping practices
  • Bonuses and benefits
  • Hiring of new employees to avoid disproportionate overtime for reclassified positions

When is this effective?

The final regulations were submitted to the Office of Management and Budget for approval in early March, 2016. Based on information we have heard, final regulations are expected to be released in early July and effective by September 5, 2016 (Labor Day). If this expected timing holds, there will be a very short implementation period (approximately 60 days).

There are efforts in Congress to block these regulations, but it is not clear at this point whether these efforts are likely to succeed. This has been a priority of the administration since 2014, so even if Congress passes a bill to block the changes, it is unlikely that President Obama would sign it.

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