Changes to Overtime Pay Rules Effective December 1, 2016

As directed by Pres. Obama, the U.S. Department of Labor published new regulations in May regarding overtime pay under the Fair Labor Standards Act (FLSA) to be effective December 1, 2016.  The FLSA requires employers to pay most employees at least the Federal minimum wage and to pay for overtime, which is the number of hours worked in excess of 40 in a workweek, paid at a rate of 1 ½ times the regular hourly rate.  Federal and Utah minimum wage is currently $7.25 per hour and Utah follows the FLSA overtime rules.  Exemptions from overtime pay is permitted for employees who work in certain administrative, professional, or executive jobs.  An exemption is also provided for highly compensated employees not working in one of these areas.

A minimum “salary-level” test must be met for employees working in executive, administrative, or professional positions to be considered exempt from overtime pay.  On December 1, 2016, the minimum increases to $913 per week ($22.825/hour or $47,476/year) up from the current $455 per week ($11.375/hour or $23,660/year).  The regulations provide for automatic increases to these amounts every three years, the first increase beginning January 1, 2020.

For the highly compensated person not working in one of the three areas, the current compensation level of $100,000 per year is increased on December 1, 2016 to the 90^th percentile of earnings for all full-time salaried employees which is $134,004.  This amount will also be adjusted every three years.

Employers should review their employee classifications to ensure that exempt employees are properly classified.  Be sure that job descriptions accurately reflect the employees’ duties.  Exempt employees earning less than the new annual compensation of $47,476 will need to receive overtime pay starting December 1, 2016.  The regulations permit nondiscretionary bonuses, incentives, and commissions to satisfy up to 10% of the new standard salary level, but these payments must be made quarterly.  If an exempt employee works overtime, and earns close to the new salary level, it may be less expensive to give the employee a raise to meet the new exemption standard instead of making overtime payments, or else prohibit the working of overtime.  Adjusting an employee’s compensation to meet the new standard introduces several other complications to be considered, such as considering whether raises must be given other employees to treat them fairly, and being cognizant of any equal pay issues between men and women having similar duties.

More information can be found on the DOL website here.

Update 

On November 22, 2016, a federal judge in Texas blocked implementation of the new overtime rules pending a court decision on the legal challenge against the rules.  Several business groups and 21 states challenged the legality of the rules issued by the DOL.  While welcome news to employers, it comes very late and employers may have already discussed pay increases with employees which will be very difficult to take back.  More information can be found here.