The Overtime Rule
NOTE: On February 22, 2017, the U.S. Court of Appeals for the Fifth Circuit granted a request by the Department of Justice for an extension of time of sixty days, until May 1, 2017, in which to file its reply brief. The additional time was requested on behalf of the Department of Labor “to allow incoming leadership personnel adequate time to consider the issues.” Nevada v. DOL, No. 16-41606, Motion For Extension to File Reply (Feb. 17, 2017)
In 2014, President Obama directed the Secretary of Labor to update the overtime regulations to reflect the original intent of the Fair Labor Standards Act and to simplify and modernize the rules so they’re easier for workers and businesses to understand and apply. The department has issued a final rule that will put more money in the pockets of middle-class workers – or give them more free time.
The final rule will:
- Raise the salary threshold indicating eligibility from $455/week to $913 ($47,476 per year), ensuring protections to 4.2 million workers.
- Automatically update the salary threshold every three years, based on wage growth over time, increasing predictability.
- Strengthen overtime protections for salaried workers already entitled to overtime.
- Provide greater clarity for workers and employers.
The final rule will become effective on December 1, 2016, giving employers more than six months to prepare. The final rule does not make any changes to the duties test for executive, administrative and professional employees.1
Here are a few key points of the new rule:
1. Increases. Starting Dec. 1, the salary cap for overtime will increase to $47,476, or $913 per week. The previous threshold was $23,660, or $455 a week. That means any employee who earns under the threshold will be eligible for overtime for time worked over the standard 40-hour work week.
2. Top earners get more. Some highly compensated employees who generally don’t have executive or decision-making authority in the business will also get an increase, with their overtime threshold increasing to $134,000 from $100,000 annually.
3. More increases are coming. Although it’s the subject of two lawsuits, the salary threshold will get an update every three years. (It is currently indexed to the Census’ 40th percentile of weekly earnings in the lowest earning region of the U.S.) That means you can expect further wage hikes in 2020.
4. An important out. Businesses with revenue of less than $500,000 annually are exempt from the new rules.
Want to minimize your cost?
1. Raises. Increase your employees’ salaries so they earn more than the new threshold.
2. Change worker status. Turn salaried workers into hourly workers without reducing the amount of their take-home pay. This is known as paying them at a cost-neutral salary rate, where you account for the overtime worked in the new hourly pay schedule.
3. A new contract. Come up with a new salary agreement, stipulating that salary is for up to 50 hours per week, and that you pay additional half-time pay for the extra 10 hours. That’s allowed in 44 states, McCutchen says. (The exceptions are Alaska, California, Connecticut, Hawaii, New Mexico, and Pennsylvania.) But don’t do this on your own — get legal help to make sure your agreement holds water.2