On May 18, 2016, President Obama announced the publication of The Department of Labor’s Final Rule updating Federal overtime regulations.  The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt.  According to the Department of Labor, the Final Rule, which becomes effective on December 1, 2016:

  1. Sets the standard salary level of $913 per week, $47,476 annually, for a full-year worker;
  2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to $134,004; and
  3. Establishes a mechanism for automatically updating the salary and compensation levels every three years.

Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.

But what does that mean for small businesses?  Federal overtime rules are included in the Fair Labor Standards Act (“FLSA”) which applies to employees of enterprises that have an annual gross volume of sales or business done of $500.00 or more.  The Federal overtime rule provides that covered non-exempt employees (including employees paid on an hourly basis) are entitled to overtime pay at a rate of not less than one and one-half times the regular rate of pay for any hours worked over 40 hours of work in a workweek.  Under the FLSA’s “white collar exemption” certain executive, administrative and professional employees are exempted from the overtime requirements.  To fall within the present “white collar exemption” an employee generally must:

  1. Be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary based test”);
  2. Be paid at least a specified salary threshold, which is presently $455 per week (the equivalent of $23,660 annually for a full-year employee) (the “salary level test”); and
  3. Primarily perform executive, administrative, or professional duties, as provided in the Department’s regulations (the “duties test”).

Under the “white collar exemption” calling an employee a “manager” is not enough to satisfy the “duties test”.  For the “white collar exemption” to apply, the employee’s specific job duties must meet all of the applicable requirements provided in the Department’s regulations. 

The Final Rule primarily affects the “salary level test” under the “white collar exemption” by raising the salary threshold of $455 per week ($23,660 annually) to $913 per week ($47,476 annually).  The Department estimates that change will immediately affect 4.6 million workers exempt under the current regulations. 

 What does this mean for your business? 

It means that if you currently have managers or other executive or administrative level employees that presently are exempt from overtime requirements under the current “white collar exemption”, but who receive annual compensation of less than $47,476, as of December 1, 2016 you may be required to pay such employees overtime for any hours over 40 hours per week that they work during a workweek. 

Now is an important time for all small businesses to evaluate whether their employees are properly classified under federal and state labor regulations and to determine whether prospective staffing and scheduling changes may be necessary to avoid incurring unnecessary increases in labor costs.