Businesses are still buzzing about the government’s long-awaited revised overtime rules.
The Department of Labor (DOL) had provided a sneak peek in the form of proposed regulations issued in 2015, putting many employers on high alert about the main changes. Recently, the department provided additional guidance on two exemptions that often fly under the radar.
Under the Fair Labor Standards Act (FLSA), employees must be paid time-and-a-half their regular pay rate for overtime above 40 hours a week unless they fall under an exemption. Employers who don’t adhere to the rules could be liable for payroll taxes on top of the payment due for overtime.
DOL regulations have generally required each of the following three tests to be met for employees to be exempt from overtime pay:
- Salary basis. The employee must be paid a predetermined and fixed salary that isn’t subject to reduction because of variations in the quality or quantity of work performed.
- Salary level. The amount of salary paid must meet a minimum specified amount.
- Duties. The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the DOL regulations.
Before the recent revised rules, the DOL last updated these regulations in 2004. At that time it set the weekly salary level at $455 ($23,660 annually) and introduced an exemption for “highly-compensated employees.”
The new regulations more than double the wage threshold to $913 a week ($47,476 a year). This limit will be adjusted every three years, beginning January 1, 2020. Employees earning less than that amount are entitled to overtime pay regardless of their job responsibilities.
A Threshold Reset
The goal of these changes is to reset the income threshold to the point it would have reached, with inflation adjustments, had it not been frozen more than a decade ago. With the higher wage threshold, millions of “white-collar” employees — including those in executive, administrative and professional capacities — will qualify for overtime pay.
In a related change, the annual pay threshold for highly-compensated employees was boosted, from $100,000 to $134,004. Employees earning more than this may be treated as exempt regardless whether the duties test would classify jobs as non-exempt.
Bottom line: Beginning December 1, 2016, employees who earn between $47,476 and $134,004 may earn overtime pay. Their status will be determined by the same duties test that has been in place for years. For this purpose, an employee’s pay includes nondiscretionary bonuses, incentive pay and commissions, as long as those payments occur at least quarterly and don’t exceed 10% of compensation.
The guidance from the DOL focuses on two types of employers, educational institutions and state and local governments.
Because of special regulations, many white-collar employees at higher education institutions aren’t subject to the salary level test or are subject to a different test. The new salary level won’t affect them.
For instance, the salary level and salary basis requirements for the white-collar exemption don’t apply to bona fide teachers. Academic administrative personnel that help run higher education institutions and interact with students outside the classroom are governed by a special alternative salary level. These employees include department heads, and academic counselors and advisors. They are exempt from the FLSA overtime requirements if they earn at least the entrance salary for teachers at their institution.
However, workers whose duties aren’t unique to the education setting, such as managers in food service or the institution’s bookstore are covered by the same salary level as their counterparts at other kinds of institutions and businesses.
State and Local Governments
Neither the FLSA nor the DOL regulations provide a blanket exemption from overtime for state and local governments. However, the FLSA contains several provisions unique to state and local governments, including compensatory time (comp time).
State or local government agencies may arrange for their employees to earn comp time instead of cash for overtime hours. Any comp time arrangement must be established under the terms of:
- A collective bargaining agreement,
- A memorandum of understanding,
- An agreement between the public agency and representatives of overtime-protected employees, or
- An agreement or understanding between the employer and employees before the work is performed.
The comp time must be provided at a rate of 1.5 hours for each hour of overtime. The comp time is paid at the regular rate of pay.
Comp Time Ceilings
Most state and local government employees may accrue up to 240 hours of comp time. Law enforcement, fire protection and emergency response personnel, as well as seasonal workers (such as those processing state tax returns), may accrue up to 480 hours of comp time in one pay period.
The FLSA also provides an exemption for fire protection or law enforcement employees working for an agency with fewer than five employees. This exemption is based on a “work period” rather than a “work week.”
A work period may be from seven to 28 consecutive days. Overtime compensation is required when an employee’s hours worked exceed the maximum hours in the regulations. An employee must be permitted to use comp time on the date requested unless that would “unduly disrupt” the operations of the agency.
The final overtime rule takes effect on December 1, 2016. That should give employers ample time to comply with the changes and to develop plans for the future.
Potential H.R. Changes
Employers of all stripes have their work cut out for them between now and December 1. This may trigger other H.R. and payroll changes in light of the new overtime requirements. Keep in mind that there’s no “wrong” or “right” way to do things. Your payroll advisers can lend a helping hand.