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Employment Law for Contractors

Labor Department Raises Overtime Exemption Levels

UPDATE: On November 22, 2016, a federal judge blocked implementation of the new overtime rules discussed below, pending a final ruling in a legal challenge mounted by 21 states.

In the News: Tucson Contractor to Pay $48,000 in Back Wages, Damages (Arizona Republic, July 26, 2016)

On May 18, 2016, the U.S. Department of Labor (DOL) announced changes to the Fair Labor Standards Act that will sharply increase the minimum salary requirement for overtime-exempt employees. The changes go into effect December 1, 2016.

Under the current rules, the minimum salary threshold to qualify for the overtime wage exemption is $455 per week ($23,660 per year). After the new regulations kick in, the minimum salary level for qualifying for the exemption will double, to $913 per week or $47,476 per year.

The minimum salary will be automatically updated every three years, beginning in 2020. An increase that doubles the current minimum salary test will have a significant impact on companies that have managers, professionals and administrators who are exempt under the current regulations but are making less than $47,476 per year.

  Construction Advisor

This article originally appeared in the July 2015 issue of Lang & Klain's "Construction Advisor" and was updated in June 2016


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The new regulations will, for the first time, allow employers to use nondiscretionary bonuses and incentive payments to satisfy up to ten percent of the salary level, so long as those payments are made on a quarterly or more frequent basis (but note that there are different requirements for “highly compensated employees,” i.e., workers whose total annual compensation, under the changes that go into effect December 1, is at least $134,004).

Example

You have an office worker, “Bob,” to whom you pay a $500 weekly salary. In an average week, he works 50 hours and is exempt from overtime pay.

Under the new regulation, Bob’s $500 weekly salary will be $413 below the $913 per week minimum to qualify for the overtime exemption. If you pay him $12.50 an hour ($500 divided by 40) and he continues to work 50 hours a week, he will earn 10 hours of overtime pay at the rate of $18.75 per hour. Bob’s total pay would go from $500 under the current rules to $687.50 under the new rules.

What’s Behind the New Rules

According to a July 7, 2015, National Law Review article (“Exempt Status in Jeopardy: FLSA Salary Requirements Skyrocket”), the Labor Department suspects that 85% of all white-collar workers who are classified as overtime-exempt pass the “salary test” but fail the “duties test” and should not be exempt. (In other words, their job duties do not meet the standards for “Executive, Administrative and Professional” positions for which the overtime exemption was originally intended.) Thus, the DOL decided to increase the objective salary requirements in an effort to more strictly apply overtime exemptions.

The article speculates that the DOL might also revise the duties tests associated with various exemptions and add job classes for potential exempt status. According to the frequently asked questions that the DOL published with the final rule, the standard duties test is unchanged.

What to Do

Various observers suggest that, while you are waiting for the new rules to go into effect, you take a few steps to cut your losses:

  • Audit your exempt employees’ workloads to determine your likely overtime exposure.

  • Recognize which employees’ work weeks can be capped at 40 hours.

  • To avoid excessive overtime for reclassified positions, consider the cost of additional full-time or part-time employees.

  • Consider whether current exempt positions are accurately classified.

  • Review your exempt job descriptions to make sure they accurately describe the duties performed and discretion used.

The new regulations do not require that employees earning a salary of less than $47,476 per year be paid on an hourly basis. Employees may continue to be paid a salary, but the employer will be required to pay overtime on the salary if the employee works over 40 hours per week. Companies should consult their employment attorney regarding overtime requirements and methods of calculating overtime for nonexempt salaried employees.

Another thing to keep in mind: Under the automatic increase to the minimum salary level that will occur every three years, employees who are near the minimum salary level will be required to be given a raise annually to keep up with the minimum salary increases that begin in 2020. Your business planning and budgeting should account for the automatic increases.