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13 Jun 2016

FLSA Overtime Final Rule: What You Need To Know and What To Do

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U.S. Department of LaborWASHINGTON — The Final Rule is a long-expected change to the outdated Fair Labor Standards Act (FLSA) overtime pay policies.

It was released on May 18, 2016 by the U.S. Department of Labor after being heavily promoted by President Barack Obama and many members of his administration.

The policies that comprise the Final Rule are intended to expand overtime pay protection and clarity to over 12.5 million additional workers.

The questions and answers listed below cover the details surrounding the final rule, and address what’s included in the final rule, as well as compliance and communication strategies, budget implications and possible morale and productivity issues.

When Does The Final Rule Go Into Effect?

The Final Rule was approved and signed by President Barack Obama in May of 2016, however, the new policies will not take effect until December 1, 2016. This delay exists to give employers a sufficient amount of time to make the necessary adjustments and institute new policies with their employees.

For those seeking to pursue their newfound opportunity to receive overtime benefits, it is important to understand that you will not be able to pursue overtime pay eligibility until the Final Rule is officially in effect.

What Are Employees Entitled To Under FLSA And The Final Rule?

While the Final Rule will be changing which workers will be eligible to receive overtime benefits, the benefits themselves will remain unchanged. The primary overtime benefit is the payment of  at least “time-and-a-half,” or 1.5 times standard pay rate, for each hour an employee works beyond 40 hours.  This policy applies to salaried workers whose earnings fall below the overtime salary threshold – which has been raised with the passing of the Final Rule.

How Has The Final Rule Expanded Overtime Benefits To Working Americans?

The main change the Final Rule offers are new pay wage and salary thresholds that serve as overtime pay eligibility cutoffs. Previously, the standard salary level threshold to be eligible for overtime pay was $23,660 ($455/week). However, the Final Rule will raise that threshold nearly 110% to $47,476 ($913/week). This increase salary threshold will make overtime pay benefits available to millions of Americans nationwide.

In addition to the increase of the standard salary threshold, the Final Rule will also increase the total annual compensation requirement for HCE’s (Highly Compensated Employees). The previous threshold to receive overtime pay sat at $100,000, the Final Rule will increase that number to $134,004. However, relevant duties tests will still apply to those seeking to be deemed eligible for overtime pay.

Does The Current Salary Threshold For The Final Rule Include Other Compensation?

While the Final Rule gives employees a great deal of power to pursue overtime pay benefits, it does include a provision that grant employers some flexibility. This flexibility comes in the form of an employer being able to use non-discretionary bonuses, incentive pay, and commissions to meet the EAP salary threshold. Non-discretionary bonuses differ from discretionary bonuses as they are promised to an employee to incentive them to work more efficiently or stay with the company.

However, there a several stipulations that restrict just how much flexibility is offered to employers. These stipulations are as follows:

  • Payments must be made on – at minimum – a quarterly basis
  • Payments may not exceed more than 10% of the required salary threshold

In the event that an employee fails to earn sufficient enough bonuses or commissions, they must receive a “true-up” payment immediately after the quarter ends to align their compensation with the salary threshold. If an employer fails to issue this payment to their employee, that employee would be eligible to pursue overtime benefits as laid out by the Final Rule.

How Often Will Threshold Levels Update And How Will They Be Adjusted?

Another major policy change  that will be brought on by the Final Rule is the existence of an automatic minimum salary adjustment every three years. The first of these adjustments will take place on January 1, 2020 and will see the minimum salary threshold for exemptions change, based on the annualized weekly earnings of the 40th percentile of full-time salaried workers in the lowest-wage U.S. Census region. As of June 2016, the region that will be used for this adjustment will be the South.

Meanwhile, the HCE minimum salary adjustment will be based on the annual weekly earnings of the 90th percentile of full-time salaried workers. This adjustment will be based off of all workers nationally – not a single U.S. census region.

It is important to note that these adjustments will be applied to the newly announced salary thresholds which will be $47,476 ($913/week) and $134,004 for EAP and HCE exemptions, respectively.

Will My Employer Be Subjected To New Overtime Pay Laws?

Employers who have annual gross sales or business of $500,000 or more are typically subjected to following all overtime policies of the Fair Labor Standards Act. However, there are exceptions to the $500,000 qualification amount. These qualifications include hospitals, institutions who engage in the care of the elderly or disabled individuals, specialty schools, government entities, and schools ranging from preschool to institutions of higher education.

Employees whose employers have annual business of over $500,000 or who fall under the exception list are covered on an enterprise-wide basis, as opposed to an individual basis.

What Exceptions To New Overtime Pay Laws Exist?

Exceptions to the Final Rule are the same exemptions that existed under previous FLSA policies. The first of these exemptions is the executive, administrative, and professional (EAP) exemption. This exemption applies to those whose earnings are above the overtime salary threshold and meet the necessary duties tests, which typically include proving that an employee must customarily and regularly perform a duty of any exempt EAP type employee. More information on this exemption can be found here.

The other exemption category for overtime pay policies are highly compensated executives (HCE). Similar to the EAP exemption, the HCE exemption is routinely referred to as a white collar exemption. While duties tests for HCE exemptions are not as strict as EAP tests, they are still often used by employers to attain exemption status for its employees. More information on this exemption can be found here.

Does The Final Rule Change “Duties Tests” In  Any Way?

Duties Tests” are the requirements that must be met for an employer to be able to qualify one of their employees as an EAP or HCE exemption. These tests – much to the approval of employers – will not be altered in any way under the new overtime pay policies.This means that while your salary eligibility status may change, your eligibility regarding a duties test result will not.

How Are Businesses Preparing For The Final Rule?

The policy changes that will be implemented by the Final Rule constitute the most significant changes to overtime pay policy in decades. However, with over six-months available for businesses to make adjustments in preparation, three common preparation methods are being pursued by various major U.S. employers.

The first of these methods involves the employer increasing the salaries of their employees. This method is expected to be used on employees that currently have overtime pay exempt status under FLSA policy. By simply increasing these salaries to what the new salary threshold will be, businesses are able to minimize additional efforts needed to combat the Final Rule.

Forfeiting their employees exempt status but strictly controlling their overtime numbers has also surfaced as a possible preparation method. Employers are more likely to use this method for employees who regularly work close to 40 hours per week. This method is difficult to pursue as it requires stringent monitoring of telecommuting and other “off the clock” work endeavors.

Other businesses are likely to change employees from salaried to hourly workers  to reduce the hourly rate they may need to pay their employee when they work overtime. Fiscally, this method may be the best option for businesses in the wake of December 1, 2016. However, it may not be as common as businesses would like as it levy an unmanageable burden on administration resources and lead to a demoralized work force.

Do New Overtime Pay Laws Apply To Nonprofit Organizations?

While non-profit organizations are typically not covered under enterprise coverage, it is possible for a select number of their workers to claim eligibility to overtime pay benefits through individual coverage.

Enterprise coverage is typically applied when an employer generates revenues of at least $500,000 per year. However, donations, contributions, and membership fees to non-profits for charitable activities do not count towards the necessary $500,000. This stipulation is what frequently allows non-profits to avoid enterprise coverage for overtime benefits.

If a non-profit runs a separate entity for business purposes, the employees at that entity may be entitled to enterprise coverage. An example offered by the Society For Human Resource Management is if a non-profit operated a sandwich shop. Their example states that if that restaurant generated over $500,000 per year, the restaurant employees would be covered “by the FLSA on an enterprise basis.”

However, if a non-profit does not operate an entity that leads to its workers qualifying for enterprise coverage, individual employees may still qualify for overtime benefits. These employees would be those who execute actions of the following nature:

  • Interstate Communications (Mail, Phone Calls, E-Mail, etc.)
  • Handle Out-Of-State Order Or Delivery Of Goods
  • Execute Accounting Duties (Credit Card Transactions, Budgeting, etc.)

An employee who regularly is tasked with these actions may be eligible to claim overtime pay benefits under new overtime policies through individual coverage.

How Will Different Groups Be Effected By The Final Rule?

When using current data offered by the U.S. census regarding salary and wage earnings, it is possible to estimate that the new overtime pay policies will open overtime pay benefits, protection, and clarity to 12.5 million American workers.

*This number breaks down by large demographic groups in the following way(s):

  • 6.4 Million Women (50.9% Of All Effected)
  • 4.2 Million Parents
  • 1.5 Million Black Workers
  • 2 Million Hispanic Workers
  • 3.6 Millions Workers Age 25 – 34
  • 4.5 Million Millennials (Age 16 – 34)
  • 3.2 Million Workers With Only A High School Degree

These numbers are important to note as they indicate that these new policies will promote overtime pay for demographics that were typically being strategically paid above the threshold to avoid more appropriate payment figures.

This can be seen as while black workers make up only 8.9% of the salaried workforce, they constitute 12% of those now eligible for benefits. Same too for Hispanics, as they represent 11.8% of the salaried workforce but 16% of the benefiting workforce. Additional percentage figures showing how the Final Rule will work to close a major salary disparity can be found here.


*Note: These numbers will not total 12.5 million workers as several of the demographics overlap with each other.

Will The Final Rule Have A Significant Impact In My State?

The new overtime pay policies will effect all states. However, some states will be able to see a greater effect due to the nature of the states industry, demographics, etc. If you define a possible impact as how many workers will be effected, recent data allows us to predict the states that will likely have the greatest percentage of salaried workers positively effected by the Final Rule.

These states in accordance to estimates by the Economic Policy Institute are as follows:

  1.  West Virginia: 30.7%
  2.  Arkansas: 30.6%
  3.  South Carolina: 30.3%
  4.  Florida: 29.3%
  5.  Tennessee: 29.2%
  6.  Idaho: 29.1%
  7.  Georgia: 28.2%
  8.  South Dakota: 28.2%
  9.  Delaware: 27.7%
  10.  North Dakota: 27.5%

All states will likely see a significant impact in the amount of workers eligible to pursue and receive overtime pay benefits.

How Will My Job Be Effected By New Overtime Pay Policies?

Just as state level impact, the Final Rule will have an impact in multiple, if not all, industries but will have its most noticeable in a select few. These industries and the future overtime pay impact, includes:

  • Agriculture, Forestry, Fishing, and Hunting: 39.7%
  • Leisure and Hospitality: 37.3%
  • Service Industry: 33.2%
  • Construction: 32.6%
  • Public Administration: 32.5%

Breaking down this impact even more, current estimates for impact on single occupations stand to look like:

  • Office & Administrative Support Staff: 46%
  • Transportation & Material Movers: 40.4%
  • Farming, Fishing, and Forestry: 40.2%
  • Construction and Extraction: 38.9%
  • Service Occupations: 38%

Just as demographic data, the aforementioned data regarding state, industry, and occupational impact of new overtime pay policies were initially published by the Economic Policy Institute.

What Is The Predicted Economic Benefit Of New Overtime Pay Laws?

To further justify the passing of the Final Rule, the Department of Labor has done extensive research to determine what the true economic impact of these new overtime policies will be.

This research has led to the Department of Labor and the presidential administration to claim that the U.S. economy will see an additional $12 billion in workers pay over the next decade, $1.2 billion per year.

What Have Been Reactions To The Final Rule?

Reactions to the approval of the Final Rule have been mixed. Employees hail it as a victory for working Americans who can now come closer to making suitable wages for their work. However, employers pan it for forcing them to make cuts in the future or limit the flexibility they afford to their employees. The new policies have also be on the receiving end of fierce partisan debate in congress prior to its approval.

Some complaints find their base in claims that the Final Rule does not take regional variations, seasonal fluctuations, and employee desire for work flexibility into account. Opposing these claims, supporters say that the rule will not lead to workforce downsizing and any negative side effects will be offset by the positive impact of stronger worker protections and increased wages across the nation.

Why Was The Final Rule Needed?

Government officials have been calling for FLSA policy to be updated for years, as it has severely fell behind the times over the last four decades. While overtime pay regulations were initially passed with the intent to apply to a majority of working Americans, recent figures indicate that it now only applies to 7% of salaried workers. This figure was reported as part of Vice President Joe Biden’s announcement of the Final Rule’s approval. Vice President Biden cited that the policy applying to 62% of salaried workers four decades ago but only 7% today as justification for new policy to be passed to protect the middle-class workers that have “been getting clobbered.”

What Legal Action Can I Take To Claim My Overtime Pay Benefits?

If your employer has not paid you the appropriate overtime wages, you can pursue the legal process of filing an overtime wage lawsuit. This legal process can begin by coming into contact with an attorney who is well verse in the legal code that is associated with these situations. An overtime pay lawsuit will work to win your just compensation for previously unpaid overtime wages and benefits.

Who Can I Contact To Begin An Overtime Pay Lawsuit?

To begin an overtime pay lawsuit against your employer, you can contact a member of our expert legal team today. We will provide you with FREE CONSULTATION and will not charge you any fees whatsoever unless you win a settlement. You can contact us for free by calling (855) 263-3525 or by filing out a case review form. Beginning a lawsuit as soon as possible is the most effective way to ensure your lawsuit qualifies for state deadlines and other legal requirements.

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