Last month the Department of Labor adopted a rule updating the federal overtime regulations as of December 1, 2016. The Department stated that this update fulfills President Obama’s goal of improving the American workplace and “will go a long way to ensuring every worker is compensated fairly for their hard work.” Estimates are that this update will bring overtime pay to more than 4 million new employees by the end of 2017.

As many of our clients will recall, there are certain exemptions to overtime pay. For example, outside sales representatives and properly classified independent contractors should not be entitled to overtime pay under federal law. There are also more well-known overtime exemptions for workers that can be classified as “Executive”, “Administrative”, or “Professional”.

However, to fit a worker into the Executive, Administrative or Professional exemption certain requirements must be met. For example, the Administrative exemption requires that the worker be engaged in office work related to the operations of the business, have discretion or independent judgment to make important decisions, and must be on a salary basis of at least $455 a week or $23,660 a year. Similarly, the Executive exemption requires the employee to manage a department or division of the business, direct at least two employees and have hiring and firing authority. The Executive exemption also requires a salary of at least $455 a week or $23,660 a year.

There is also a so-called “Highly-Compensated” employee exemption, allowing an employee who fits into some but not necessarily all the categories of the Executive, Administrative or Professional exemptions to possibly still be classified as exempt from overtime if they earn annual compensation of at least $100,000.

The primary impact of this update is that it doubles the salary and compensation levels needed for the Executive, Administrative and Professional exemptions. Specifically, the $455 a week compensation level is being raised to $913 a week ($47,476 a year). In other words, for an employer to argue a worker is exempt from overtime because he or she fits into the classification of an Executive, Administrative or Professional exemption, then, in addition to meeting the other tests of the applicable exemption, the worker must earn at least $913 a week ($47,476 a year) in salary. The earning level for the Highly-Compensated exemption is updated from $100,000 to $134,000.

10% of these new salary thresholds can come from non-discretionary bonuses, incentive payments, and commissions, if they are paid at least quarterly.

Going forward, the update also sets up a mechanism for automatically updating this salary and compensation level every three years.

We advise all clients to take care to examine existing job classifications and structures before an audit or lawsuit shows up at your door. Wage and hour audits have been increasing annually for over 12 years. Employer liability exists not only as to improperly classified independent contractors, but under these new thresholds we know that increased attention will be given to W2-based employees as well. Make sure you can defend each and every job position on your staff.

Please contact us directly at (703) 759-1055 if we can provide any further information.