Insights & News

Employment NewsFlash, May 2016 - Update
Seven Steps to Compliance With New Overtime Law

May 26, 2016
Client Alert
On May 18, 2016, the Department of Labor published the final rule revising the overtime provisions of the federal wage law. With a compliance deadline of Dec. 1, 2016, employers need to fully prepare now to implement the sweeping changes to the law. 

Effective Dec. 1, 2016, the new final overtime rule changes the law as follows: 

  • Employees earning less than $913 per week ($47,476 per year) will now be entitled to 1.5 times the regular rate of pay for all overtime hours worked, absent certain limited exceptions for teaching professionals, practitioners of law or medicine, or – depending on their compensation structure – computer professionals and outside sales employees. Up to 10 percent of the new salary minimum may be met by non-discretionary bonuses, incentive pay or commissions, provided these payments are made on at least a quarterly (not annual) basis. Catch-up payments on a quarterly basis are authorized in certain circumstances. 
  • To maintain an exemption from overtime as a “highly compensated employee,” annual compensation must now be $134,004. Highly compensated employees must be paid base salary of $913 per week. Non-discretionary bonuses, incentive pay and commissions may continue to be counted toward the $134,004 annual compensation minimum as under the prior rule, but such compensation may not be used to satisfy the $913 weekly salary requirement. 
  • The above minimums will be automatically updated every three years, with the first update announced Aug. 1, 2019 and effective Jan. 1, 2020. Effective Jan. 1, 2020, it is anticipated that the new salary minimum will be $51,168 and the new highly compensated employee minimum will be $147,524. 
  • The Department of Labor published detailed guidance for the non-profit sector, institutions of higher education, and state and local governments. Legislation has been introduced to stop the new rule, although it remains to be seen whether the opposition will gain any traction. 

In preparation for the upcoming change, employers should implement the following seven-step procedure to identify and address potential overtime compliance issues under the new law. By generating a list of affected positions and addressing issues by process of elimination, employers will forge a clear path to compliance. 

Step One:
Generate a list of all positions with a base salary ranging from $23,660 ($455 per week) and $47,476 per year ($913 per week), as well as all positions with annual salary between $100,000 and $135,000.

Step Two:
Strike any position from the list that is already eligible for overtime under current federal or state law or company payment practices. For any position with a base salary in excess of $47,476 per year ($913 per week), strike the position from the list if the duties of the position allow the company to rely on an exemption other than the highly compensated employee exemption.

Step Three:
Strike any position from the list not subject to the salary basis requirement under federal law, such as certain teaching professionals and practitioners of law or medicine.

Step Four:
Review any remaining positions with a salary close to the new proposed $47,476 per year ($913 per week) minimum threshold. Identify any position where finances allow increasing salary for the position to the new $47,476 minimum, recognizing that the minimum will increase in three years. If increasing base salary is not feasible, consideration should also be given to implementing a quarterly (not annual) non-discretionary bonus, incentive pay or commission plan, which may be used to meet up to 10 percent of the new $47,476 minimum. If the company relies on the “highly compensated employee” exemption, review any positions close to the new $134,004 annual compensation (salary plus incentive compensation) and $913 weekly salary (excluding incentive compensation) minimums applicable to highly compensated employees, to determine whether compensation may be increased to meet the new requirements. Strike any position from the list where compensation will be increased to meet the new minimum.

Step Five:
From the remaining positions on the list, identify any position for which business needs require an average workweek in excess of 40 hours (or in excess of the overtime hours requirement under applicable state law if overtime pay is more liberally required). For those positions, determine whether to (a) convert to hourly rate and absorb the costs of overtime, or (b) restructure the position to reduce the need for overtime. Seasonal fluctuations in hours also should be considered to the extent temporary or part-time hires may be utilized to reduce the need for overtime work. For any position where overtime hours are not anticipated, plan to convert compensation to an hourly rate and limit overtime work as appropriate. 

Step Six:
Plan employee communication strategies. Employees converted to overtime eligible status often resist the typical time-tracking and work-hour constraints associated with overtime-eligible positions. Plan to train converted employees and managers regarding procedures for seeking pre-approval of overtime, reporting all hours worked and limiting the need for overtime work. Review existing overtime policies regarding advance approval of overtime and reporting overtime hours worked. In order to minimize overtime hours, remote electronic access policies may require revision or remote access may need to be limited for those employees no longer eligible for overtime.

Step Seven:
Announce any changes in status or compensation to employees and payroll providers in advance of Dec. 1, 2016, but actual implementation of the changes may be delayed until Dec. 1, 2016. 

With a compliance deadline of Dec. 1, 2016, employers should take steps now to prepare for the changes in the overtime law. Appropriate management, human resources, finance and legal personnel should be consulted to minimize the financial impact to the company and the risk of future noncompliance.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest. 

Copyright © 2016 Stradley Ronon Stevens & Young, LLP. All rights reserved.


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