Department of Labor Proposes Updated Overtime Rule

The Department of Labor (DOL) has released a proposed rule updating which employees are exempt from overtime pay requirements under the Fair Labor Standards Act (FLSA).

Employees who are not exempt from the FLSA must be paid overtime rates of at least 1.5 times the employee’s regular rate for any hours worked in excess of 40 hours in a week. On the other hand, employees who are exempt from the FLSA do not have to be paid for overtime work.

Currently, employees must meet three tests to be considered exempt. The “salary basis test” requires that the exempt employee is paid a fixed salary that cannot be reduced on the basis of hours worked or amount of work completed. The “salary level test” requires that the exempt employee earn at least $455 per week ($23,660 per year). The “duties test” requires that the exempt employee’s job duties include primarily executive, administrative, professional or outside sales functions.

The proposed rule doesn’t alter the duties test or salary basis test, but it does raise the minimum compensation threshold for the salary level test to $970 per week ($50,440 per year). The last time this threshold was raised was in 2004. The threshold would also vary according to the economy. The DOL would set the number every year at the 40th percentile of all salaried employees in the U.S. according to the Consumer Price Index. This instability may lead to an increased administrative burden for employers, who would have to closely monitor employee compensation to ensure compliance with the rule.

The proposed rule also would change criteria for exemption for highly-compensated employees (HCEs) who make over $100,000 per year. Currently, HCEs must make at least $100,000 per year to be considered exempt; the proposed rule would set that threshold at the 90th percentile of earnings for full-time salaried workers, currently $122,148 per year.

The proposed rule is open for comments for 60 days, after which the DOL will publish a final rule and effective date. Once effective, the rule could affect millions of employees, increasing costs for employers.

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