On May 18, 2016, President Barack Obama and Secretary of Labor Thomas Perez announced the publication of the Department of Labor’s (DOL) Final Rule updating the regulations governing overtime pay under the Fair Labor Standards Act (FLSA). The updated rule will automatically extend overtime pay protections to 4.2 million new employees within the first year of its implementation.

Overtime protections were established in 1938 with the implementation of the FLSA. The overtime protections established the general standard that employees must be paid time-and-a-half for any hours worked over 40 hours in a week. In general, all hourly employees are guaranteed overtime pay. Salaried employees are entitled to similar overtime protections unless the employee both (1) makes more than the salary threshold set by the DOL, and (2) passes a test demonstrating that he or she primarily performs executive, administrative or professional duties (the “Duties Test”).

Secretary of Labor, Tom Perez[Image credit: Bloomberg]
Secretary of Labor, Tom Perez

[Image credit: Bloomberg]

Because the salary threshold set by the DOL has not kept up with inflation, the number of salaried employees qualifying for overtime pay has plummeted. In an effort to address this, President Obama signed a Presidential Memorandum in 2014 directing the DOL to update regulations defining which white collar workers qualify for overtime protections. Pursuant to the President’s memorandum, on July 6, 2015, the DOL published its Notice of Proposed Rulemaking in the Federal Registers (notice). The DOL received over 270,000 comments from different stakeholders, including many employer and employee organizations, in response to the notice. These comments helped shape the DOL’s Final Rule.

The Final Rule contains three key provisions:

1. The Final Rule raises the salary threshold from $23,660 to $47,476 per year (or from $455 per week to $913 per week). While the DOL’s initial notice included a slightly higher salary, the DOL addressed public comments regarding regional variations in income and set the salary threshold at the 40th percentile of full-time salaried workers in the lowest income Census region (currently the South).
2. The Final Rule raises the salary threshold for highly compensated employees (HCE) from $100,000 to $134,004. The DOL set this threshold at the 90th percentile of full-time workers nationally. Above $134,004, the employer need only make a minimal showing to demonstrate that the employee is not eligible for overtime. The purpose of the HCE threshold generally is to ease the burden on employers in identifying overtime eligible employees. The increased threshold in the Final Rule is certain to reduce the number of HCEs exempt from overtime protections.
3. The Final Rule establishes a mechanism for automatically updating the above salary and compensation levels every three years to maintain the salary levels at the above percentiles.

In comments to the notice and proposed rule, employers expressed concern over any changes to the Duties Test, and argued that changes would be difficult and costly to implement. The DOL listened to these comments and made no changes to the Duties Test.

The effective date of the final rule is Dec. 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and the HCE total annual compensation requirement (from $100,000 to $134,004 per year) will become effective on that date. The automatic updates to these thresholds will begin Jan. 1, 2020, and will occur every three years thereafter.

In addition to having a significant impact on American workers by broadly expanding the number of employees entitled to overtime pay, the Final Rule is also certain to have a considerable impact on all employers, both large and small.

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