FLSA Overtime Rule Changes
Status of the Final Rule
FLSA Overtime
Changes: Final Rule
The U.S. Department of Labor’s (DOL) final rule on the
Fair Labor Standards Act of 1938 (FLSA) overtime changes
was published on May 23, 2016 in the Federal Register.
It is effective on Dec. 1, 2016.
Salary Levels:
What Can Organizations Do to Prepare?
●●
Exempt salary threshold level increases
by 101% to $913 per week, or $47,476 per year
(40th percentile of weekly earnings for full-time
salaried workers), beginning Dec. 1, 2016.
●●
Employers may use nondiscretionary bonuses
and incentive payments (including commissions)
to satisfy up to 10% of the new standard salary
threshold level, provided these payments are
made at least quarterly.
●●
Exempt highly compensated employees’
(HCE) total annual compensation requirement
increases to the annualized value of the 90th
percentile of weekly earnings of full-time
salaried workers — a 34% increase from
today’s $100,000 to $134,004 annually.
Some suggested actions include:
●●
Identify employees currently classified as exempt
who will fail the new salary-level test.
●●
Model potential costs based on course of action
(e.g. raise pay to new threshold level; re-classify
employees as nonexempt and pay overtime; lower
pay to offset overtime requirement).
●●
Review job descriptions and tasks of affected
positions to determine if certain exempt tasks and
responsibilities may be reassigned or maintained
with the current position.
●●
Consider how pay changes or other changes
(e.g., job assignments) may affect your organization
(e.g. pay compression with next level; loss
of supervisory career paths).
●●
Review potential courses of action with
senior leadership.
●●
Discuss with affected employees any changes to their
exempt status and how this new regulation will affect
their wages, workplace flexibility and benefits.
●●
Develop administrative implementation plans, including
changes to payroll and HRIS systems, training for
employees and managers and updates to
employee handbooks or procedures.
Automatic Updates:
Businesses must determine how to
absorb these costs to comply with
the final regulations. Total rewards
professionals also should consider
employee communications,
benefits, morale and workplace
flexibility issues that likely will result
from the anticipated changes.
WorldatWork has many resources for
total rewards professionals to use for their
education about the new requirements on its
website, www.worldatwork.org.
●●
The standard salary level will update
automatically every three years through the
40th percentile of earnings of full-time salaried
workers in the lowest-wage census region,
currently the South. The DOL estimates
the overtime standard salary threshold will
be approximately $51,168 in 2020, but this
estimate assumes employers will reclassify
workers as salaried nonexempt and not hourly
nonexempt. If newly nonexempt employees are
reclassified and paid hourly, the overtime salary
threshold will be significantly higher than the
DOL estimate.
●●
The HCE threshold fixed to the 90th percentile
of full-time-salaried workers nationally will
automatically update every three years.
It is estimated to be $147,524 in 2020.
●●
The DOL will post new salary levels 150 days
in advance of their effective date beginning
on Aug. 1, 2019.
Duties Test:
●●
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No changes to the duties test were included in
the final rule.
FLSA Overtime Rule Changes
Background
A top area of concern is whether wages for employees
ultimately will increase with this change. Labor costs are
among the largest costs for most businesses and are
closely monitored to avoid budget overruns. It is unlikely
that employers will increase their overall labor costs by
simply paying formerly exempt employees additional
overtime. Employers likely will offset that cost through
some corresponding reduction in other areas of employee
compensation. Thus, the administration’s goal to increase
wages paid to workers may not be realized.
Since the FLSA was enacted in 1938, the U.S. government
has updated the salary-level requirement seven times.
In 1975, the regulation covered 62% of salaried workers.
Because of significant inflation and changes in the
economy’s structure, by the time President George W.
Bush raised the salary level in 2004 to $455 per week,
or $23,660 annually, the overtime threshold covered
8% of salaried workers.
President Barack Obama sent the DOL an official
directive on March 13, 2014, instructing U.S. Secretary
of Labor Thomas Perez to revise the regulations guiding
exempt-employee overtime pay under the FLSA. Obama
sought new regulations that would expand the eligibility
for more employees to receive overtime pay. With the
Obama administration’s 2016 update, the regulation now
covers about 35% of those with a nonexempt salary.
The triennial update beginning in 2020 will have a
significant impact on employees as they begin to
classify more employees as hourly nonexempt and
they are removed from the salaried worker population.
WorldatWork’s compensation experts performed
modeling based on the new salary level and triennial
updates and found that after 15 years under this regulation
only 14.9% of the exempt population would remain above
the 40 th percentile threshold. Even by 2020 it could be
as high as almost $71,000 per year, which is 65.8% of
today’s exempt workforce.
WorldatWork’s Analysis
According to the DOL’s own estimates, the new overtime
requirements have the potential to erode approximately
4.2 million employees’ exempt-worker status because
they will fall under the $47,476 salary threshold.
WorldatWork and other organizations believe that
estimate to be dramatically low.
Reclassifying employees to nonexempt status likely
will lead to other negative consequences. Job flexibility
will suffer. Under exempt status, because of their
regular salary employees are afforded a level of work
flexibility to take a few hours off for an appointment
or tend to a family matter without being docked in
pay. Nonexempt employees will be forced to take this
time as unpaid, which will limit their ability to address
personal obligations.
The DOL itself estimates the rule could cost employers
an additional $12 billion in extra pay in the next decade,
and calculates total employer costs to average between
$239.6 and $255.3 million annually. According to the
DOL, the biggest effect will be on the health services,
wholesale/retail trades, professional and business
services, and leisure and hospitality industries.
WorldatWork’s Action
WorldatWork continues to lobby Congress to pass the
Protecting Workplace Advancement and Opportunity Act
(S. 2707/H.R. 4773), which would send the regulation back
to the DOL to conduct a more detailed economic analysis
before enforcing the new rules. The legislation also requires
the DOL to follow the formal notice and comment period
before any updates to the salary levels take effect.
Current as of June 2016.
The DOL’s regulation will dramatically affect the ability of
WorldatWork’s members to maintain the decision-making
flexibility needed to adapt compensation to a mutually
beneficial result agreed upon between an employee
and employer. The 101% increase to the salary level
will be detrimental to many employees.
For news about the regulation, visit www.worldatwork.org/flsaovertime
or follow WorldatWork’s Public Policy team on Twitter at @WorldatWork_DC.
For more information about the FLSA overtime rule changes, please contact:
WorldatWork Washington, D.C. Office | 1100 13th Street, N.W., Suite 800 | Washington, D.C. 20005-4281 | (202) 315-5500 | www.worldatwork.org | @worldatwork_dc
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