The Labor Department has issued a rule that doubles the salary threshold for overtime exemption, effective Dec. 1. This is a big change for business owners and workers alike. But why? And how big? Here’s an explanation.
What’s an overtime exemption? Is it good or bad?
It depends on which side of the payroll you’re on. Employers, generally speaking, like their workers “exempt.” Workers, by and large, prefer to be “nonexempt.” This is because to be “nonexempt” means to be protected under the minimum wage and overtime provisions of the Fair Labor Standards Act. Workers who are “nonexempt” are entitled to be paid a certain minimum wage (currently $7.25 per hour nationwide, but higher than that in most states), and are also entitled to be paid time-and-a-half for any time spent working beyond 40 hours in a week.
To be “exempt” means to be, well, exempt. From the FLSA’s protections, that is—including those mandating the payment of a minimum wage and overtime. Employers can pay these workers whatever amount they feel is appropriate, and can make them—or let them—work as many hours as a job takes without having to pay extra.
So this rule simply changes who is exempt and who is nonexempt from the FLSA?
Correct. But that’s a big deal. Fun fact: Most of the disputes, arguments, and lawsuits surrounding the FLSA—including this one—don’t revolve around what the law actually requires. Instead, they simply tackle the issue of who should be protected under those requirements. In other words, it’s not what’s in the law that counts; it’s who the law covers.
You said minimum wage and overtime are both FLSA protections. Why is this only about overtime?
Minimum wage is almost never an issue. That’s because to be classified as exempt, a worker has to be paid a certain amount, called the “salary threshold.” The salary threshold is, naturally, much higher than the minimum wage—about $4 per hour higher. So no exempt worker sues their employer, claiming that they should be classified as nonexempt so that they can get in on that sweet minimum wage money.
Instead, it’s overtime where the real wage-hour battles are. There are a lot of workers who don’t get paid time-and-a-half when they work more than 40 hours per week, even though the FLSA requires it—because they’re exempt from the FLSA. To be classified as exempt, a worker has to pass (or, from the worker’s point of view, fail) two tests: the “salary test,” which means that they have to be paid the salary threshold or higher; and the “duties test,” which means that their job duties put them into one of a handful of categories—bosses, salespeople, and technical experts, for example—that the FLSA lists as too special for overtime pay.
What makes these categories so special as to merit an exemption?
It’s complicated. Indeed, the vast majority of lawsuits spring from workers claiming that their jobs are not really as special as their employers think they are, and that the only reason their employers called their jobs special in the first place was to avoid paying overtime.
Fortunately, for the purposes of this latest news, we don’t have to get into all of that. That’s because DOL’s new rule change affects only the salary test and leaves the duties test intact.
And how does it change the salary test?
We’re finally at the crux of the issue. The way the test is set up right now, workers earning more than $23,660 per year are considered exempt (if they meet the duties test as well). That means that they are not eligible for overtime pay.
But starting Dec. 1, only workers who earn more than $47,476 per year will be considered exempt (if they meet the duties test as well). So anyone who was making, say, $31,200 a year—or $15 per hour—in a non-“special” job would not be eligible for overtime pay today, but they would starting in December.
The rules do allow non discretionary bonuses, commissions and incentive payments to satisfy up to ten percent of the standard weekly salary level test as long as the payments are made at least quarterly.
And how many workers will go from exempt to nonexempt once this kicks in?
It’s hard to say for sure, but when DOL released the rule May 17, it estimated that 4.2 million workers currently exempted from overtime pay could become eligible for it.
So what should the employer do to get ready?
- Determine which employees will be impacted?
- Evaluate whether you are going to increase the salary of the impacted employees to the new exempt rate or whether you are going to make them hourly.
- Meet with the impacted employees individually.
- Establish a time system to insure hours are recorded correctly.
- Determine the impact on your budget moving forward.
That’s a lot of overtime. So, is this a done deal then?
Yes and no. This is a final rule, so the executive branch of the government has done its part for now: It’s gone through the comment process (which caused DOL to lower the salary threshold from what they had originally proposed) and issued the regulations. Now the other two branches can have at it, with legislative and court challenges almost certain to arise before the effective date. A change this large on an issue this volatile, that affects so many employers—and during an election year, no less—is bound to dominate the business landscape for months to come.
