On May 18, 2016, President Obama and the Secretary of Labor announced the publication of the Department of Labor’s final rule updating the overtime regulations, which is anticipated to make more than four million more workers overtime-eligible.
The Final Rule sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest wage Consensus Region, currently the South ($913 per week; $47,476 annually for a full-year worker). It also sets the total annual compensation requirement for highly compensated employees (HCE) (who only have to perform a single exempt function to qualify) to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004) It also established an automatic updating procedure; every three years salary levels may/may not be adjusted.
On a more positive note, the Final Rule will allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. For employers to credit nondiscretionary bonuses and incentive payments (including commissions) toward a portion of the standard salary level test, such payments must be paid on a quarterly or more frequent basis.
Nondiscretionary bonuses and incentive payments (including commissions) are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company. Examples include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula.
The effective date of the final rule is December 1, 2016. Note that December 1 is a Thursday, so employers will have to make sure that the entire pay period is compliant with the new rule. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020. Significantly, and thankfully, the new rule makes no changes to the duties test. If an employee had duties that fell within the executive compensation, for example, they will still be exempt, provided that they make $913 per week.
I am not of the school of thought that believes the sky is falling with the increase in exempt salary levels. I have seen many employers agonize over whether someone making, say, $30,000 annually is exempt or not. Now, instead of raising that person almost 20,000 dollars, that employer will make the “easier” choice to convert that person to hourly and pay them overtime or keep that worker (insofar as operationally possible) to no more than forty hours per week.
I think that by making the lines of exemption a good deal brighter, the new rule makes it easier for employers to comply and to stop agonizing. There will still be some/many borderline calls but in demarcating the boundaries more clearly through this large jump in salary, the new rule serves a salutary purpose.