New Federal Overtime Rules: “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales & Computer Employees”

May 18, 2016
Paul Mollica

The White House today issued a blockbuster set of changes to the overtime rules under the Fair Labor Standard Act (FLSA) that will allow far more middle-class workers to earn time-and-a-half. The Final Rule doubles the standard salary floor for exempt workers, establishes automatic increases of that floor every three years, and sets a higher salary threshold for “highly compensated individuals” who are generally exempt under the 2004 rules.

The Final Rule, which goes into effect December 1 of this year, will benefit millions of American workers by updating and indexing the standard salary level. This means that for employees earning up to $47,476, the rules will deem them non-exempt and eligible for time-and-a-half overtime earnings. According to the White House, this means that – for the first time in decades – as many as 35 percent of full-time salaried workers will be automatically entitled to overtime, based solely on their salary level.

Appreciating the importance of the Final Rule begins with understanding the exemption. The FLSA generally exempts from minimum wage and overtime pay protections those workers who are “employed in a bona fide executive, administrative, or professional capacity.” The exemption is premised on the idea that these kinds of work are difficult to standardize to any time frame and could not be easily spread to other workers after 40 hours in a week, and that exempt workers are generally paid well above the minimum wage, anyway.

One part of the test set by the Department of Labor rules for this exemption is that the worker’s salary must meet a minimum standard amount. Unfortunately, that number has historically been too low and often left unchanged for decades. It has only been updated once since the 1970s – raised to $455 per week ($23,660), in a 2004 Rule. That standard salary level, which supposedly denotes professional-level employment, is actually lower than the current poverty threshold for a family of four.

The new Final Rule increases the weekly minimum salary floor to $913, double the 2004 figure. (Further, no more than ten percent of that figure may include bonuses, incentive payments and commissions made on at least a quarterly basis.) Also, beginning January 1, 2020, that number will be raised to the 40th percentile of full-time salaried workers in the lowest-wage Census region (presently the South), estimated to be $51,168 ($984 a week) in 2020. Those increases will be automatic every three years.

In short, if employers do not pay workers at least the minimum standard salary amount per year, those workers will be entitled to time-and-one-half overtime pay regardless of how their employers classify their job duties.

As a result of these changes, some 4.2 million workers currently ineligible for overtime, and who fall below the standard salary, will automatically become eligible. Moreover, nearly nine million salaried workers who might arguably meet the “duties test” for executive, administrative, or professional work will now unquestionably qualify for overtime, because their salaries will fall below the standard salary. (See the DOL’s Overtime Overview.)

Overall, the Department of Labor concludes that minority, female and especially younger workers will see the biggest boost under the Final Rule. (See the DOL’s “Who Benefits from the New Overtime Rule.”)

The 2004 Rule also created an exemption for highly compensated employees (HCE), which applies only to employees whose primary duty includes performing office or non-manual work. It requires that an employee must earn at least $100,000 in total annual compensation. This number will also be raised under the Final Rule every three years, set at the 90th percentile of full-time salaried workers nationally, estimated by the Department of Labor to be $147,524 in 2020. Workers whose earnings fall beneath that ceiling will have a renewed opportunity to show that their duties do not qualify for the exemption.

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(*Prior results do not guarantee a similar outcome.)