2016 Promises Big Changes to Rules for Salaried Employees

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Nearly five million salaried employees could become eligible for overtime pay.

Big changes are coming to regulations governing salaried workers in 2016. New rules from the Department of Labor (DOL) will reduce the number of employees who may be classified as “exempt” from overtime regulations. The DOL estimates that nearly five million salaried workers will be affected in the first year alone.

The Fair Labor Standards Act (FLSA) establishes overtime, minimum wage, recordkeeping, and other employment standards. It generally applies to enterprises with annual sales or revenue of $500,000 or more, and a small number of additional businesses. The FLSA exempts certain executive, administrative, professional, and computer employees from federal overtime and minimum wage requirements.

To qualify for these exemptions under the current rules, employees must satisfy certain job duty requirements and be paid at a rate not less than $455 per week or $23,660 per year. This minimum income requirement has been in place since 2004. Employees who are not exempt from FLSA requirements earn overtime at one and one-half times their regular rate of pay for any hours worked beyond forty hours in a workweek.

Under the new rules, the minimum salary threshold will more than double. In order to remain exempt from overtime pay regulations, employees who meet the job duty requirements will need to earn at least $970 per week or $50,440 per year, even if their job duties remain unchanged. This means that a salaried employee who is currently exempt from overtime regulations but earns less than $970 per week or $50,440 per year will be entitled to overtime pay under the new rules in 2016.

The DOL also proposed a few other important changes. Rather than be subject to periodic legislative adjustments, the DOL has proposed automatically adjusting the minimum salary thresholds. Annual adjustments may be made based upon weekly earnings for salaried employee data published by the Bureau of Labor Statistics, or by referencing the Consumer Price Index. Either way, the minimum salary threshold to remain exempt from overtime requirements is likely to increase every year.

Changes may also be made to types of income included in calculating whether an employee meets the minimum salary thresholds. Currently, bonus payments of any kind are not considered. Under the new rules, the DOL may allow for nondiscretionary bonuses paid to salaried employees to count towards partial satisfaction of the updated minimum salary thresholds.

Finally, the new rules will increase the total annual compensation requirement for highly-paid employees. Currently, employees meeting minimum duty requirements and earning $100,000 per year are exempt from overtime requirements. Under the new rules, the minimum salary will rise to $122,148, and this figure will be subject to automatic annual increases as well.

The DOL estimates that these changes will result in a direct cost to employers of $239.6 to $255.3 million per year, and employees will see $1.18 to $1.27 billion more in their pockets.

The DOL’s proposed new rules did not make any changes to the existing duties requirements, although the DOL invitedthe public to comment on proposed changes. One potential change under consideration is whether employees exempt from overtime requirements should be required to spend a minimum percentage of their time at work performing exempt duties. While significant changes to the duties requirements are not anticipated, employers should be aware that changes are possible. Part of the stated reason for the DOL’s proposed changes is to ensure that the FLSA’s intended overtime protections are fully implemented, so increased enforcement actions may be seen after the rules take effect.

While the final rule has not yet been published, all employers should be aware that significant alterations to the pay structure of employees currently exempt from overtime regulations who make between $23,660 and $50,440 per year may be required. The FLSA does not exempt state or local governments, non-profits, or small business from its rules. The final rules are expected to be published in the early 2016 and will likely become effective later in the year.
Employers should take a look at their workforce and begin planning for changes now before the rules take effect. For many employers, the new rules will require increasing the salaries of currently-exempt employees or converting currently exempt employees to non-exempt employees eligible for overtime. Employers may also need to consider operational adjustments to offset increased labor costs. Note that reclassifying employees from exempt to non-exempt status may carry a range of legal, operational, and morale implications.

Damien Munsinger is an attorney with Barran Liebman LLP, where he represents and advises private and public entities on a range of labor and employment law issues. Contact him at 503-276-2112 or dmunsinger@barran.com.

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