The Department of Labor (DOL) has finalized a rule that, effective December 1, 2016, will make significant changes to the overtime regulations in the Fair Labor Standards Act (FLSA). As you know, employees covered by the FLSA must receive overtime pay for all hours worked over 40 in a workweek at a rate of not less than one and one-half times their regular rates of pay, unless otherwise exempt. The FLSA’s “white collar” exemptions exclude certain executive, administrative, and professional (EAP) employees, and outside salesperson, from the federal minimum wage and overtime rules. Currently, to qualify for exemption, white collar employees generally must: (1) be salaried, meaning that they must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) be paid more than a specified standard salary amount which is currently $455 per week (the equivalent of $23,660 annually for a full-year employee) in existing regulations (the “salary level test”); and (3) primarily perform executive, administrative, or professional duties, as provided in the DOL’s regulations (the “duties test”). The current regulations also contain a relaxed duties test for certain employees (highly compensated employees) who receive total annual compensation of $100,000 or more and are paid at least $455 per week.
 
The New Rule Changes

Under the final rule, the standard salary level used to determine whether EAP employees and computer professionals are eligible to receive overtime will increase from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) for a full-time worker beginning in December. Employers are not necessarily in compliance with the new standard salary level threshold if they just meet the $47,476 annual threshold. An employee’s eligibility to receive overtime is determined on a weekly basis.
 
Self-Employed Individuals

Any employee who owns at least a bona fide 20 percent equity interest in the enterprise in which the employee is employed and who is actively engaged in its management is not subject to the salary basis or salary level requirements, and therefore, is not affected by the rule changes.
 
Outside Sales Employees

Outside sales employees are not subject to the salary basis or salary level requirements, and, therefore, are not affected by the rule changes.
 
Paying a Salary to Non-Exempt Employees

“Salaried status” and “exempt status” are separate concepts, so employees entitled to overtime pay may still be paid on a salary basis as long as they receive overtime pay for working over 40 hours in a workweek.
 
Seasonal Employers

A seasonal employer must comply with these rules during the period the employer is open for business. For example, if a seasonal employer is open during 8 months of the year, the employer will need to guarantee during the eight-month period that at least $913 per week is paid to an employee exempt from receiving overtime.
 
Job Classification

Employees with one particular job classification do not all have to be classified as either eligible or exempt from overtime. The determination is made on an employee by employee basis.
 
Compliance Options

The DOL notes that employers have multiple options for complying with the new overtime rule. Options include:

(1) Raise salary and keep the employee exempt from overtime.

Employers may choose to raise the salaries of employees to at or above the salary level to maintain their exempt status, if the employees meet the duties test. The DOL says that this option works best for employees who have salaries close to the new salary level and regularly work overtime.

(2) Pay overtime in addition to the employee’s current salary when necessary.

Employers can also continue to pay their newly overtime-eligible employees the same salary, and pay them overtime whenever they work more than 40 hours in a week. The DOL says that this approach works best for employees who work 40 hours or fewer in a typical workweek, but have occasional spikes that require overtime for which employers can plan and budget the extra pay. The DOL also notes that there is no requirement in the rule to convert employees from salaried to hourly in order to calculate their overtime pay.

(3) Limit workers’ hours to 40 hours per week.

Under this option, employers must ensure that workload distribution, time, and staffing levels are all managed appropriately for their white-collar workers who earn below the salary threshold. Employers could hire additional workers to achieve this goal.

These rules can be complex depending on individual situations. If you have any questions, please contact Reilly, Penner & Benton, LLP so that you can put your concerns at ease. We are the professionals in the industry aimed at helping you meet all the complex compliance issue in the tax and accounting world today and far into the future.