New Rule Means Overtime Pay for More Workers

Beginning December 1, 2016, many more employees will be entitled to overtime pay at a rate of one and one-half times their regular hourly rate for all hours worked over 40 per week. The Department of Labor has issued new regulations re-defining the positions that qualify as exempt from overtime compensation.

Currently, in order for an employer to avoid paying overtime, it must pay an employee at least $455 per week in salary and the employee’s job duties must meet certain tests (see below). As of December 1st, the threshold salary moves up to $913 per week, or $47,476 per year. If an employer does not increase an employee’s salary to the threshold level, then the employer must pay the employee overtime pay for all hours over 40 per week, regardless of whether the employee’s job duties would otherwise qualify as exempt tasks. The DOL’s final rule also imposes automatic increases to the salary threshold every three years, beginning on January 1, 2020.

The DOL’s final rule attempts to address misclassification issues by employers. For example, employers have employed individuals as “managers” or “assistant managers” and classified them as exempt from overtime under the Executive (a.k.a. Managerial) Exemption. They often pay these employees the minimum salary required ($455/week) and force them to work a lot of overtime. Even though these employees are given managerial titles, they usually perform the same manual tasks as the hourly workers, which means that employers often get “free overtime”. This has encouraged employers to misclassify employees in order to avoid paying overtime. Now, however, with the increased salary threshold, it should force employers to evaluate whether an employee truly fits within the definition of exempt.

The DOL’s final rule does not change any of the duties tests for the White Collar Exemptions. In addition to meeting the salary test identified above, an employee’s duties must fall within one of the following tests in order to be considered exempt from overtime:

Executive Exemption Test:

  • The employee’s primary job duty must be managing the enterprise or department;
  • The employee must customarily and regularly direct the work of at least two or more other full-time employees; and
  • The employee must have the authority to hire or fire employees, or their recommendations given particular weight.

Administrative Exemption Test:

  • The employee’s primary job duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer; and
  • The employee’s primary job duty must include the exercise of discretion and independent judgment in matters of significance.

Professional Exemption Test:

  • The employee’s primary job duty must be the performance of work requiring advanced knowledge and which includes the consistent exercise of discretion and judgment;
  • The advanced knowledge must be in a field of science or learning; and
  • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Creative Professional Exemption Test:

  • The employee’s primary job duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The DOL’s final rule also implemented a change to the highly compensated employee exemption. This exemption currently applies to all employees earning at least $100,000 per year. After December 1st, the salary threshold is increasing to $134,004 per year.