Department of Labor Announces Changes to Overtime Rules

Today was an historic day in the world of overtime law. After more than two years of considering and debating whether to make changes to portions of the Fair Labor Standards Act’s governing regulations, the United States Department of Labor announced a series of changes that are scheduled to become effective on December 1, 2016. So what is changing and why does it matter to Indiana workers?

First, the minimum salary threshold for employers to elect to pay salaries to exempt employees will increase from the current amount of $23,660.00/year ($455.00/week) to $47,476.00/year ($913.00/week). That means employers who wish to pay exempt employees (i.e. employees employed in a bona fide executive, administrative, or professional capacity) via a salary will be required to pay those workers at least $47,476.00/year beginning on December 1, 2016. Because the change only applies to exempt, non-overtime eligible, employees, the new rules should not impact the rights of non-exempt employees who are still required to be paid overtime wages of at least one and one half times their regular rate for all hours worked in excess of forty in a workweek. Because the salary basis method of payment is optional, employers remain free to pay affected employees an hourly wage, including overtime wages at the required rate when earned, instead of increasing the salaries of exempt workers to meet the new minimum salary threshold.

Second, the minimum salary threshold will be updated every three years. Unsurprisingly, the calculations for this are rather involved, but these updates could be significant. For example, based on recent wage data, the Department of Labor estimates that the minimum salary threshold would increase by more than $4,000.00/year to around $51,000.00/year at the time of the next update (December 1, 2019).

Third, the highly compensated employee threshold, which creates an exemption for otherwise non-exempt employees who earn $100,000.00/year or more in salary, will be raised to $134,004.00/year. Additionally, employers can now use bonuses and commissions to reach the minimum salary threshold for highly compensated employees, although there is a cap on that offset of 10% of the salary threshold ($13,400.40/year) so employees will have to be paid at least $120,603.60/year in salary and earn the difference ($13,400.40 or less) in bonuses and commissions in order for the highly compensated employee exemption to apply.

Fourth, no changes will be made to the “duties test” that is utilized to determine which employees are exempt from the overtime provisions of the FLSA.

My initial impression is these changes should benefit many exempt employees in Indiana and throughout the country, as they should result in increased annual earnings and/or compensation more in line with the actual hours worked by affected employees. But these changes will not cripple, and should not create chaos for, savvy employers. It should be noted that the changes will not impact most employees. The Department of Labor’s decision to leave the “duties test” unchanged provides a lot of stability for companies who have taken appropriate measures to ensure compliance with the relevant provisions of the FLSA as the pool of non-exempt employees will not grow as a result of these changes. Furthermore, the FLSA is not being altered, so options remain in place for employers who do not wish to subject themselves to the salary basis test. Thus, while today’s announcement is an important victory for many employees throughout the country, it is not something that most employers need to fear.

The final rule can be viewed by downloading the pdf here: