Coming Soon: New Overtime Regulations

As you may have seen in the news, the federal Department of Labor (DOL) has been working on regulations to update the salary levels used to determine classification of exempt executives, administrators, and professionals.

This modernization effort was sparked by President Obama, who charged DOL with updating the regulations back in 2014.  Proposed regulations were issued last summer, and more than 200,000 comments were received.  Since then, DOL has been putting the finishing touches on its regulations, which were recently sent to the federal Office of Management and Budget (OMB) for approval.  Once approved, the regulations will be published in final form and will take effect 60 days later.  DOL and OMB have not disclosed when the final regulations will be published; however, there is some expectation that it will occur in the next few months.

As a general matter, to qualify as an exempt employee, an employee must be paid on a salary basis no less than a mandated minimum salary amount, and must meet the requirements of job duties test for an exempt executive, administrative, or professional employee.  Highly compensated executive, administrative, and professional employees may be classified as exempt so long as they have at least one exempt responsibility from one of the job duties tests and are paid a significantly higher mandatory minimum, however, computer professionals may not qualify as exempt under the “highly compensated” category.

If the new regulations implement the same updates as contained in the proposed regulations, the following changes will take effect:  (1) the minimum salary amount for standard exempt status will increase from $455 per week to $970 per week (an increase from $23,660 per year to $50,440 per year); (2) the minimum annual salary amount for highly compensated employees will increase from $100,000 per year to $122,148 per year; and (3) both salary levels will increase annually based on an indexing system.  We will not know the final wage levels until the regulations are published.  No changes to the job duties tests were contained in the proposed regulations, although there may be changes to those tests in the future. 

These salary level changes could have a very significant impact on many employees and employers.  The immediate impact, once the regulations take effect, is that any exempt employee who is paid less than the new mandatory minimum (or a highly compensated employee paid less than the required level who does not otherwise qualify under a standard exemption) will be entitled to be paid overtime, unless their compensation is increased to meet the minimum standards and maintain the exemption.  On a broader scale, we can also anticipate that there will be an increase in auditing and enforcement efforts by the DOL, and increased outreach to employees by the DOL (and plaintiffs’ wage and hour attorneys), which may lead to an increase in litigation over unpaid overtime.

What should employers do now?  As mentioned, the final regulations will take effect 60 days after they are published.  Although we will not know the effective date or final wage levels (or whether annual indexing will be required), employers are encouraged to start preparing for these changes by:

  • Determining whether any of their exempt employees are currently paid less than $50,440 (or, for highly compensated employees, less than $122,148).
  • For those employees who fall below the salary threshold, doing a cost analysis based on average hours worked to determine whether it is more cost effective to increase the employee’s compensation to maintain the exemption or pay overtime when the regulations take effect.
  • Preparing to either increase compensation or reclassify the employees once the regulations take effect.
  • Preparing for annual increases.

Given the likelihood of increased audits and overtime claims following the regulations taking effect, employers are also encouraged to take this opportunity to review the exempt classification of all of its employees to determine whether they are properly classified (even if they are paid more than the anticipated minimum salary level) or if they should be reclassified as non-exempt.  Please bear in mind that proper classification requires more than just confirming salary level and payment on a salary basis.  It also requires an individualized review of the employee’s actual job duties (not just job description or job title) to determine whether they are functioning as an exempt employee under legal standards. 

Melissa Calhoon Jones, chair of the Labor and Employment Group, counsels companies on employment, labor, and immigration issues.  For more information on these new regulations and other employment concerns, please contact Ms. Jones via email or 410.752.9765.

This information has been prepared by Tydings for informational purposes only and does not constitute legal advice.