New Overtime Threshold at $47,476 a Year; Inclusion of Bonus Adds to Complexity of Rule

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By Ben Kegley and Mike Baer

A final rule to qualify more employees for overtime compensation, which more than doubles the standard salary threshold but allows bonuses and commissions to count toward the new level, was issued May 18 by the Labor Department.

The new rule (RIN 1235-AA11), which is to take effect Dec. 1, requires that executive, administrative and professional employees be paid at least $47,476 a year, up from $23,660, or $913 a week, up from $455 a week, to meet the salary basis test for the overtime exemption. The amount is to be updated every three years, with the first update to occur Jan. 1, 2020.

The duties tests, which are applied in addition to the salary basis test to qualify for the exemption, are unchanged under the final rule.

The rule also increases the annual wage amount for highly compensated employees, who qualify to use a less-comprehensive duties test for the exemption, to $134,004 from $100,000. Certain bonus amounts to meet this higher threshold, allowed under prior regulations, are to continue to be allowed as long as highly compensated employees receive at least the $913 weekly salary without any bonuses.

Payment of Bonuses Required at Least Quarterly

For the standard salary threshold, the new rule allows employers to include nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the $47,476 annual amount. To credit such payments toward the salary threshold, these payments must be made at least quarterly.

An example from the final rule assumes Employee A is an exempt professional employee who is paid weekly, with the standard salary level test of $913 a week. Employee A must receive $821.70 a week in salary (90 percent of $913), and the remaining $91.30 must be made up in nondiscretionary bonuses, incentive payments or commissions, paid at least quarterly.

Employers have an additional pay period to pay an employee a lump sum to raise the employee’s earnings for the quarter to the standard salary level if the equivalent of $91.30 a week if bonuses were not been paid by the end of the quarter, the final rule said. If no such payment is made, Employee A is entitled to overtime pay for extra hours worked during the quarter.

Additional bonuses paid in the quarter that are greater than $91.30 a week may not be applied to the standard annual salary threshold amount, the rule said.

Revised Level for Highly Compensated Employees

The $134,004 annual wage amount to be applied to those who would qualify under the highly compensated employee test is nearly $12,000 more than what the Labor Department proposed in mid-2015.

According to the final rule, the compensation level is set to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally, based on the fourth quarter of 2015. The proposed rule used 2013 salary data to come up with the $122,148 figure in 2015, the final rule said.

This differs from the formula for the standard salary level threshold, which is based instead on the 40th percentile of full-time salaried workers in the lowest income region in the country.

The final rule establishes that automatic updates to the standard salary threshold and the highly compensated employee salary threshold are to occur every three years on Jan. 1, with the first to come Jan. 1, 2020. The Labor Department would publish the updated rates in the Federal Register at least 150 days before the effective date, and post the information on the department's Wage and Hour Division website.

Additional Agency Guidance

State and local governments, nonprofit employers and higher education institutions received additional guidance in three technical documents released by the Labor Department with the final rule, a White House fact sheet said May 17.

In the months leading up to the final rule, comments from employers and interest groups cited potential hardships in applying the higher salary threshold because of the circumstances in these communities. The final rule does not address these concerns.

For employers in higher education, the guidance outlines the existing types of exemptions available for teachers, coaches, undergraduate and graduate students and academic administrative personnel. For others, it suggests that employers could raise salaries, evaluate and realign employee workloads or pay overtime to workers. The same options were discussed in the guidance intended for the nonprofit sector.

Under the guidance, state and local governments may substitute compensatory time for cash overtime.

For employers dealing with work hours that are less predictable, the use of the fluctuating workweek method may be beneficial, some employment lawyers said. Employers using this method for calculating overtime compensation generally divide a fixed weekly salary by the actual number of hours worked in the week to determine the week's base hourly rate.

Under the method, overtime would be paid by adding an extra half-time for each hour worked in excess of 40 in a week. The FLSA allows this method for certain employees who receive a fixed salary but are not exempt from overtime provisions.

Employers considering the fluctuating workweek calculation may be motivated by wanting to maintain employee morale by not removing the salaried status from workers, Brett Bartlett, a partner in the wage and hour litigation department at Seyfarth Shaw LLP in Atlanta, told Bloomberg BNA in April.

The absence of a bright-line duties test likely comes as a major relief to various employer groups.

The Labor Department in 2015 did not propose such a change, but it posed questions for comment, including whether the department should adopt a quantitative test that an employee spend at least 50 percent of the time spent performing exempt job duties to be deemed ineligible for overtime pay.

“The business community overwhelmingly said do not touch the duties test, so we didn't,” Labor Secretary Perez said in a teleconference on the final rule.

Responses to the New Rule

President Barack Obama and worker advocacy groups called the rule a long-overdue modernization of outdated FLSA rules.

Many employer groups opposed the change. On Capitol Hill, a Republican-backed legislative challenge seeks to delay implementation of the rule. A Congressional Review Act challenge of the rule was submitted April 15.

Democratic lawmakers appeared strongly aligned in support of the rule, while a coalition of major trade associations representing employers that opposed the rule lobbied for the bill that would block the final rule's implementation.

The bill would send the rule back to the Labor Department for further economic analysis before it can take effect, but likely would face a veto from Obama.

Marc Freedman, executive director of labor law policy at the U.S. Chamber of Commerce, told Bloomberg BNA that regardless of the final rule's softened language, he would support the legislation.

“We appreciate the fact that they've come off their original proposal, but they still seem intent on doing something we don't agree with,” Freedman said.

For More Information

For more information, see the Labor Department's special web page on the new rule.