May 23, 2016

On May 18, the Department of Labor (DOL) announced its highly-anticipated revisions to the Fair Labor Standards Act’s (FLSA) overtime provisions, which will go into effect Dec. 1, 2016.

Under existing regulations, employees earning an annual salary in excess of $23,660, and who perform qualified administrative, managerial or professional duties, are not entitled to overtime pay. While the new rule does not revise the job duties test, salaried employees earning less $47,476 will now be entitled to overtime pay if they work more than 40 hours in a week. In addition, the new rule automatically updates the salary threshold every three years to match the 40th percentile of full-time salaried employees in the lowest-wage census region in the U.S.

Employers across the country – even the Obama Administration’s own Small Business Administration Office of Advocacy – asked DOL to reexamine the impact of the proposed revisions, and it appears the department listened to a certain extent: the salary basis calculation and update frequency in the final rule are different than the notice of proposed rulemaking (NPRM). Under the original proposal, the salary threshold would be determined by a national average of salaried employees’ compensation and it would be updated annually. This made it very difficult for employers to forecast staffing needs because the expense of maintaining current employees – much less hiring additional workers – would be constantly changing. Furthermore, using a national standard to determine the salary basis would disproportionally affect less-wealthy areas of the country where salaries reflect lower costs of living.

Although DOL did not withdraw the NPRM, the final rule reflects a more balanced and incremental approach to addressing overtime compensation. By Dec. 1 employers must decide how to comply with the new rule: pay time-and-a-half for overtime work, raise employees’ salaries above the new threshold, limit the number of hours worked to 40 per week or execute some combination thereof.  Employers will get some help from DOL’s first-time permitting of employers to count certain nondiscretionary bonuses, incentives and commissions towards up to ten percent of the required salary level. Employers should carefully evaluate compensation packages before making any salary adjustments or reclassifying current employees.

Before DOL issued the final rule, efforts were underway in the House and Senate to pass the Protecting Workplace Advancement and Opportunity Act (S. 2707, H.R. 4773), which would require DOL to reassess the economic impact of the rule. At this time it is unclear whether the issuance of the final rule will reinvigorate those efforts. Even if it does, proponents face an uphill battle given the very limited time before the summer recess and the November elections.

To view the rule, visit the DOL page on the Federal Register: www.federalregister.gov/agencies/labor-department.