New Overtime Rule - Get Ready Now

Bill Roeser, CPA

After months of anticipation, the Department of Labor announced on May 18, 2016, the final details of its overtime pay expansion. The new plan would make more than 4 million U.S. workers newly eligible for overtime pay as a way to combat erosion in overtime protections.

The What

The new rules grant time-and-a-half pay to all salaried workers earning less than $47,476 a year (the threshold amount) if they work more than 40 hours per week. This is more than double the current amount of $23,600 originally set in 2004, but less than the $50,440 originally proposed in 2015.  

Additionally, the threshold will be updated every three years. The goal is to ensure that the threshold stays at the 40th percentile of full-time salaries in the lowest income regions of the country (currently and expected to remain the Southeast). Based on current projections, the threshold is expected to rise to $51,000 by 2020.

Exempt or Non-exempt?

Unless specifically exempted, employees covered by the Fair Labor Standards Act must receive pay for hours worked in excess of 40 in a workweek at a rate of not less than one and one-half of their regular rates of pay. Not only will employers have to pay the overtime, they'll also be liable for payroll taxes on it.

Two tests determine whether employees should be treated as exempt, and thus not entitled to overtime pay:

  1. A pay threshold test, and
  2. A duties test, under which employees who "primarily perform executive, administrative or professional duties," are deemed exempt. The regulations spell out those criteria in greater detail.

These rules are complex. Visit for more detailed information on the above requirements.

The When

The new rules are scheduled to take effect on December 1, 2016. This gives employers six months to prepare for implementation of the rules.

The new regulations require no Congressional approval to take effect.  However, Republicans plan to work to overturn them through legislation. Business groups are pushing lawmakers to stop the Department of Labor from implementing this by passing the Protecting Workplace Advancement and Opportunity Act, a GOP-backed bill introduced in the House and Senate.  

Additional Information

The new rules appear less burdensome than the originally proposed rules. They also give employers some additional tools for meeting the threshold, such as bonuses. For the first time, employers can use non-discretionary bonuses, incentive payments, which include commissions, to satisfy up to 10 percent of the standard salary level of $47,476.

An employee’s pay for purposes of determining their exempt/non-exempt status includes non-discretionary bonuses and incentive pay and commissions, as long as those payments occur at least on a quarterly basis and don't exceed 10 percent of the employee's compensation.

Highly Compensated Threshold

In a related change, the pay threshold for "highly compensated" also went up — from $100,000 to $134,004. Employees earning above that higher amount, regardless of whether their jobs would be classified as non-exempt under the duties test, can still be treated as exempt, and thus not entitled to overtime pay.

Beginning in December, whether employees whose pay falls between $47,476 and $134,004 are eligible for overtime pay as non-exempt workers, will be determined by the same duties test that has been in place for years.

Salaried employees who, thanks to the soon-to-be-higher income threshold, will be entitled to overtime pay, don't need to be switched to being paid an hourly wage or punch a time clock. However, for salaried non-exempt employees below the threshold, it's important to track time worked to ensure the hours:

  1. Don't exceed 40 hours a week, or
  2. Employees are awarded the overtime pay they have earned.

Overtime pay will need to be determined based on calculating what the employee's salary translates to on an hourly basis for a 40-hour work week.

Impact Assessment

Here are some immediate steps to consider in response to the new rules. Start by answering these questions:

  • How many of your employees will be newly classified as non-exempt?
  • How many of them routinely work more than 40 hours per week?
  • What would it cost you if they continue to work more than 40 hours per week and are eligible for overtime?
  • What systems do you need to put in place to monitor employees' hours carefully after the new rules go into effect? The DOL says employers "may use any method they choose for tracking and recording hours" as long as it's complete and accurate.
  • Once you get a basic handle on this information, you'll face more questions. Suppose, for example, you don't implement any changes, and your payroll costs go up by more than you can manage. You will then need to address questions like:
  • What if we hire some part-time people to keep newly non-exempt employees from having to exceed 40 hours per week?
  • it be more economical to give raises to employees who are currently earning somewhat less than $47,476 to get them to the exempt level and avoid having to track their hours and pay them overtime?
  • Can we reduce or eliminate overtime hours?
  • Can we lower the salaries or wages of employees who will become entitled to overtime pay so that, when they earn overtime pay, they will wind up earning the same amount as they did before?
  • Can we make adjustments to our employee benefits program to offset the rise in payroll costs?

There are no easy answers. Each possible response raises its own issues

Can We Talk?

It's also a safe bet that your employees will have heard about the impending rule change and will look to you for answers about how it will affect them. For most employers, it's probably wise to begin engaging employees on the topic, even if you haven't mapped out the details of how you will respond. An honest "we're figuring this out" answer can be better than silence.

You've got questions ... we've got answers.