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Get Ready: New Overtime Rule Will Take Effect December 1

May 18, 2016
The new rule more than doubles the overtime pay threshold, which had stood at $23,660 since 2008.  

Starting December 1, salaried employees who make less than $47,477 annually are eligible to receive overtime pay, under a new federal overtime rule that the White House announced today.

The new rule more than doubles the overtime pay threshold, which had stood at $23,660 since 2008.

The rule was first proposed in July 2015, and slight changes made after a public comment period. Originally, the proposed threshold was $50,440.

Employers have just over six months to comply with the rule, which will take effect on December 1. The new regulations are estimated to effect 4.2 million workers not currently eligible for overtime.

To comply, employers can increase salaries above the threshold, pay overtime, or cut back on overtime hours.

Forty percent of full-time salaried workers in the South, the United States’ lowest income Census region, make less than the new threshold.

The new rule stipulates updating the overtime-exempt income threshold every three years to correspond with the 40% threshold. Based on wage growth projections, the threshold is expected to rise above $51,000 with the first update on January 1, 2020.

Rosario Palmieri, vice president of labor, legal and regulatory policy for the National Association of Manufacturers, said in a statement that the new rule “creates barriers to opportunity, severely limiting flexibility and dramatically increasing red tape, especially for small manufacturers.”

“What the administration paints as a pay raise for millions of workers could limit those options for many who strive to be part of management,” he added.

United Autoworkers (UAW) President Dennis Williams praised the new rule. “Today is a great day for millions of hardworking Americans and working families because they are finally going to be rightfully paid for working overtime,” he said in a statement. “The previous outdated overtime rules contained loopholes that many employers used for decades to exploit workers and deny them their earned pay.”

The new rule will also:

  • Raise the “highly compensated employee” threshold from $100,000 to $134,004. An employer needs only minimal proof that a highly compensated employee is not eligible for overtime. The thinking is that workers earning this high of a salary are more likely to perform job duties exempting them from overtime pay. 
  • In response to employers’ concerns during the public comment period, allow bonuses and incentive payments to count for up to 10% of an employee’s salary.

Employers who find themselves scrambling to meet the requirements by December 1 will have plenty of company, said Alexander Passatino, a partner in the Washington law firm Seyfarth Shaw and the former acting administrator of the Labor Department’ s Wage and Hour Division.

“There are employers who have started down this road and are undertaking reviews, but they are few and far between,” said Passatino. “Nobody knew until last night exactly what the salary level was going to be, and that’s a pretty important piece of information.”

Passatino says that to get things rolling, employers should first identify who falls into the wage gap between the old rule and the new. “And then you need to start reaching out and talking to the operations people, talking to supervisors and figuring out who can remain exempt and who needs to be reclassified. And that’s going to depend on the specific business and the specific position and the numbers of positions. It’s not a one-size-fits-all solution.”

It may be necessary to restructure positions to make a job more clearly exempt with a higher pay, and convert others to hourly with less pay. “The employer’s not necessarily cutting the pay of a current employee” however, said Passatino. “It might be a new position that’s opened up.”

Passatino says that with bonuses and incentives only counting toward 10% of salary, companies that pay high bonuses or commissions may have to rethink that. Instead of paying an employee $45,500 in base and a $5,000 bonus, “you might need to restructure it to be $48,000 and $2,000” to make the employee overtime exempt.

In an interview after the rule was first proposed in July, Alabama labor attorney Bryance Metheny, who represents OEMs and automotive suppliers, said that he saw the law having less of an impact on the manufacturing industry, which tends to pay higher wages, than on industries like restaurant and retail where supervisors often make in the high 20s or low 30s.

Metheny speculated that most automotive suppliers who are affected will choose to raise front-line supervisors’ salary to the $50K threshold to keep them exempt from overtime. “There’s such a big advantage to an employer to have those positions as exempt," he said, "because if the machine goes down and chaos ensues and it takes a lot of time to put it back together, they don’t have to worry about how much overtime they’re going to have to pay.”

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