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New Overtime Exemption Rules

Posted by Admin Posted on Aug 31 2016


You may have heard rumors that the Department of Labor was issuing updated requirements, pertaining to salaried, overtime-exempt employees. These requirements have been finalized, and a new Final Ruling has been issued, with an effective date of December 1, 2016.


In the past, in order for an employee to qualify for the overtime exemption, three tests had to be met; (1) the employee had to be paid a predetermined and fixed salary, not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”); (2) the amount of salary paid had to meet a minimum specified amount (“salary level test”); and (3) the employee’s job duties had to primarily involve executive, administrative, or professional duties, as defined by the regulations (“duties test”).


With the new Final Ruling, the employee must still continue to meet the required three tests, in order to qualify for the exemption; however, the salary level test has now increased from $455 to $913 per week. The good news is, for the first time ever, employers are able to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.


Remember that non-discretionary bonuses and incentive payments are forms of compensation promised to an employee, in accordance with any pre-determined standards. Holiday bonuses are considered discretionary, and therefore, do not count towards the salary threshold; nor does any benefit paid to an employee, such as medical insurance, retirement, HSA contributions, etc.


These bonuses and incentive payments must be paid on a quarterly or more frequent basis, in order to count towards the standard salary level. In the event that an employee does not meet the standard salary level in a given quarter, in conjunction with the incentive payments, employers are allowed a “catch-up” payment, which must be paid within one pay period of the quarter ending, in order for the employee to meet the standard salary level requirement.


To prepare for the upcoming changes, you’ll first need to decide whether or not your current salaried overtime–exempt employees still qualify under the duties test, as well as the salary basis test. If the employee’s annual salary threshold is currently more than the updated requirement of $913 per week ($47,476 annually), then there is nothing further that you will need to do.


However, if your employee’s salary is less than the required threshold, you’ll need to either raise their annual salary to at least the new threshold, or switch the employee over to an hourly wage. If you decide to switch over to the hourly compensation method, the employee will no longer be overtime exempt, since the requirement of the exemption is to meet all three requirements (duties, salary basis, and salary level).


Please contact us at your earliest convenience to discuss how these changes impact your business specifically, so that we can help you prepare for the transition, before its upcoming implementation date of December 1, 2016.