By Jim Evans, JK Evans & Associates LLC
You’ve likely heard through recent news media accounts that the Department of Labor has issued a proposed rule that will significantly increase the number of employees who will become eligible for overtime. Media reports have focused on the most obvious change to the regulations, i.e., increases to the overtime exemption annual salary threshold from the current $23,660 to $50,440. However, the rule change announcement encompasses 295 pages, so there are other significant potential changes that have not been reported by the media. A brief summary of these proposed and potential changes are discussed below.
You’ve likely heard through recent news media accounts that the Department of Labor has issued a proposed rule that will significantly increase the number of employees who will become eligible for overtime. Media reports have focused on the most obvious change to the regulations, i.e., increases to the overtime exemption annual salary threshold from the current $23,660 to $50,440. However, the rule change announcement encompasses 295 pages, so there are other significant potential changes that have not been reported by the media. A brief summary of these proposed and potential changes are discussed below.
- The salary threshold increase to $50,440 is a major change that will significantly impact many employers’ payroll budgets. Briefly, to retain current exemptions, the salaries of a currently exempt employee, who does not meet the proposed salary threshold, will have to be increased to at least $50,440 to retain the exemption. Alternatively, the employee will become overtime eligible. Either way, the payroll budget and operations of some businesses and organizations will be significantly impacted.
- The salary threshold of $50,440 is not stagnant. Unlike the current threshold of $23,600 which has remained unchanged since 2004, the new higher salary threshold will be reviewed and adjusted annually, based on either the Consumer Price Index (CPI) or by a method based on the actual wages paid to all salaried workers. The DOL has yet to decide which method it will use. Regardless of the calculation method, this will mean that an employee, who meets the salary threshold and is exempted in one year, may be overtime eligible in the next year when the employee’s salary does not keep pace with adjustments to the annually adjusted salary threshold.
- In addition to the salary threshold, exemption tests require that an employee also meet a “duties test”, as an administrative, executive, professional, or computer professional. A duties test is nothing new. In one form or another, duties tests have historically been used in conjunction with a salary threshold. These tests were last updated in 2004. While the new regulations don’t currently propose new duty tests, the agency is seeking information during the “public comment period” as to whether the duty tests should be adjusted and adopted as part of the final rule. This potentially opens the door to a host of other significant changes implied by the DOL, including the possibility of reverting back to a revised version of the prior long and short duty tests that were replaced in 2004.
- The proposed rule specifies that non-discretionary bonuses may be considered part of the employee’s salary; however, the amount of the bonus cannot exceed 10% of the employee’s salary and must be paid to the employee at least monthly.
- Assess the potential liability for increased payroll costs in 2016 by determining which currently exempted employees’ salaries meet or exceed the threshold of $50,440. For those that don’t meet this threshold, calculate the cost of salary increases to retain the exemptions, and/or estimated increased overtime costs if currently exempt employees become overtime eligible.
- A secondary assessment may also be made, based on a higher threshold [e.g. $55,000], to account for future annual adjustments to the threshold based on increases.
- Once the proposed rules are published in the Federal Register, there will be a 60-day public comment period before the DOL publishes the final rule. It will be important to make your feelings or concerns known to the Department of Labor by accessing www.regulations.gov.