Normal Speak: the New Overtime Rules

****EDIT: The new overtime regulations were placed on hold by a federal court. It is likely that these rules will not enter effect as they are currently written.**** 

INSTANT VERSION: Starting December 1, 2016, many white collar workers earning a salary between $23,660 to $47,476 will become eligible for overtime pay.

To clarify – as a matter of law, teachers, lawyers, and doctors are still excluded from overtime regulations, regardless of salary

Today the Department of Labor announced new rules affecting overtime pay.

First, to get a sense of what this is all about, I highly recommend checking out a great video from the DoL. It provides a quick primer on the Fair Labor Standards Act’s overtime requirement and explains the reason for these new rules. Go watch it, and then come back and read the rest of this article. It’s okay, I’ll wait!

Welcome back! Let’s talk about the final rules and what they mean.

What do the new rules do?

The new rules, which come into effect December 1, 2016, have three essential components:

1) The salary amount that exempts most professional (white-collar) employees from overtime pay has been raised, and an automatic adjustment system has been implemented,

2) The salary amount that exempts highly-paid office workers and other non-manual laborers from overtime pay has been raised, and

3) Bonuses and incentive payments can now be included when
calculating an employee’s salary amount for rules 1) and 2).

What this means is that some employees will now be eligible for overtime pay who were previously exempt because of their salary amounts, while employers will be able to count other pay programs (like holiday bonuses) when calculating those salary amounts.

Who is directly affected by these new rules?

Although some advocacy groups are claiming indirect impacts on all employees, the new rules directly affect only two groups of employees:

1) Employees who perform professional, executive, or administrative duties and are paid a salary between $23,660 (the old rule’s salary amount) and $47,476 (the new rule’s salary threshold), or

2) Office workers and non-manual laborers who are paid a salary above $134,004.

If you do not fit within these two categories, then you are not directly affected by the new rules. Hourly employees are still (generally) eligible for overtime pay no matter how much they are paid, and certain professions are still strictly exempt from the overtime pay mandate (teachers, lawyers, and doctors).

How does the salary amount change work?

The main focus of the new rules is the change in the white collar salary exemption amount, raising it from $23,660 to $47,476. If you are an employee performing professional, executive, or administrative duties (aka a “white collar” job) and earning a salary within this range, you will become eligible for overtime pay (1.5x hourly base rate after 40 hours of work in a week) when the rule comes in effect December 1, 2016.

Employers will have choose whether to pay the overtime rate, adjust how they manage affected employees – like tracking hours and restricting employees to working 40 hours per week – or raise salaries above the $47,476 threshold. It is possible, although unlikely, that some employers may reduce pay to compensate for expected overtime pay, but this would not be a step forward in the interest of retaining good workers and maintaining positive employee relations.

While there are a variety of tests and court-created definitions for what “professional, executive, or administrative duties” are, the most affected jobs fall within the retail and restaurant management industries. In other words, the shift manager at your favorite fast-food restaurant who has been working 50+ hours a week will likely be getting paid more and working the same amount of time, or will start working less with the same pay.

What is that automatic increase system?

The DoL last changed the exempted salary amount in 2004, creating a large leap between thresholds similar to the one issued today (from $8,060 to $23,660). In order to prevent future shocks to employers’ financial planning, the new rules implement a periodic auto-adjustment based on income levels in the lowest income region of the country (currently the South).

Every three years, the exempted salary amount will be changed to mirror the 40th percentile income level within the region with the lowest average annual income. As wages increase due to inflation, economic development, or other causes, the exempted salary amount will adjust to match. Employers will be able to predict future changes and alter their labor policies accordingly. For example, the DoL predicts that the first automatic increase (January 2020) will likely raise the salary threshold above $51,000, so employers can already look for future changes to occur.

Ultimately, the new rules update the salary threshold to align with inflation since the last change. The automatic adjustment system will help the law stay in step with future wage growth, while providing employers with necessary financial predictability.

I am in the affected salary range, what will happen to me?

It is all up to your employer and how it chooses to deal with these changes. You are likely going to have to track your work hours. You may start receiving overtime pay for working more than 40 hours a week. If your company can afford it, you might get a raise in salary and make more than the threshold amount (which could also come with more job duties). Your employer might change your work schedule, resulting in more time away from work with no change in pay. For example, if you work 50 hours a week now, you might be restricted to working 40 hours a week for the same salary – earning you 10 more non-work hours a week (a hopeful benefit of the new rules for many people).

Employers have several options to address these regulation changes. How they act will determine how the new rules affect you. The changes come into effect December 1st of this year, so expect a discussion with your employer about this in the very near future.



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