Friday, May 20, 2016

DOL Releases Final Regulations on 'White Collar' Exemptions

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The new overtime regulations have been released by the Department of Labor (DOL) and will go into effect on December 1, 2016. There are three major elements to the “white collar” exemptions from the Fair Labor Standards Act (FLSA) an employee must meet in order to qualify for an exemption:

  1. You must earn a salary. That's the salary basis test.
  2. The salary has to be a certain amount. That's the salary level test.
  3. The final element is the duties test, which says that the duties you perform must be commensurate with the exemption. For example, if you have a law degree but spend your days stocking shelves for a grocery store, you won’t qualify for the exemption as a learned professional. You’ll be eligible for overtime and be paid time-and-a-half for every hour worked over 40 in a week.
Currently, the duties test matters quite a bit, however, that will take a backseat under the revised regulations because the salary level is being doubled. The salary level test is easily understood, whereas the duties test is more subjective and much harder to apply week-in and week-out. In December when these new rules go into effect, more than four million workers are expected to become eligible for overtime because they are currently classified as exempt but their salaries are below the new threshold.

New Numbers Under the Salary Level Test
Currently, a worker must earn $455 a week to qualify for the exemption under the salary level test. That works out to $23,666 a year. On December 1, that rate will rise to $913 a week, which works out to an annual salary of $47,476.

How Did the DOL Reach These New Numbers?
From 1938 to 1975, the overtime rate was updated regularly to ensure people who did not earn overtime were earning a comfortable salary. In 1975, 62% of full-time workers were eligible for overtime based on the salary level test. That rate has only been updated once between 1975 and now. Inflation has steadily eaten away at the value of the salary level test to the point that currently only 7% of full-time workers are eligible for overtime based on the test. The new salary level will ensure that 40% of full-time workers are eligible for overtime. To keep pace with inflation, the new salary level will be adjusted every three years and kept at the 40th percentile.

Salary Rate for Highly Compensated Employees
The salary rate for highly compensated employees is also being raised. For a highly compensated employee, employers must meet very minimal requirements to show the worker is not eligible for overtime. Right now, that’s set at $100,000. In December, that will rise to $134,004. That is being set at the 90th percentile for all full-time workers.

Employers May Take Steps to Avoid Paying Overtime
While the new salary level will make millions more workers eligible for overtime, it won't guarantee that they will be paid overtime. Employers may seek to limit the impact of the increased load on its payroll by pursuing options to help trim cost. For workers close to the salary level, it may be economical to give the workers a raise rather than pay overtime. An employer might also trim back an individual's hours to no more than 40 in a week-to avoid paying overtime – and then hire a second person to cover the extra hours at straight time rather than time-and-a-half. Another option is to shift tasks to other employees who already qualify for the exemption.

Let us know how your company will deal with the changes. Leave a comment in the comment section below and check out our other videos on Pay News Now.