Please note: On November 22, 2016, a major change regarding the overtime rule discussed in this article occurred. Please see Agency Checklists’ November 27 article: Federal Judge Stops New $47,476 Minimum Salary Law for Overtime Taking Effect.
May 18, 2016 — President Obama and Labor Secretary Thomas Perez announced the publication of the Department of Labor’s final rule updating the overtime regulations that define whether executive, administrative, and professional employees, so called “white collar workers,” are protected by the Federal Fair Labor Standards Act (“FLSA”) as to minimum wage and overtime payment laws.
Of course, most employees within the insurance industry fall within FLSA’s general category of white collar workers.
The new rule resulted from a 2014 Presidential Memorandum, signed by President Obama, directing the Labor Department to update the regulations defining which white collar workers are protected by the FLSA’s minimum wage and overtime standards. The memorandum instructed the Department to look for ways to modernize and simplify the regulations while ensuring that the FLSA’s intended overtime protections are fully implemented.
Minimum level of earnings for overtime more than doubled effective December 1, 2016
The new rule, effective December 1, 2016, raises the minimum level full-time salaried white collar workers must earn before an employer can claim a legal exemption from paying overtime.
The new rule provides that a white collar worker must earn $913 per week, or $47,476 annually, before an employer can claim a legal exemption from paying overtime. Presently, if a white collar worker earns less than $455 per week they must be paid overtime regardless of the white collar exemption (as explained further below).
Basic rule of overtime in federal law is payment of time-and-a-half “unless exempt”
The Federal overtime provisions contained in FLSA state that, unless exempt, employees must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay.
The new rule does not change the basic law that employees entitled to overtime must earn one and one-half their regular rate of earning.
The new 508-page rule, published in the Federal Register on May 23, 2016, entirely focuses on the “unless exempt” exception that applies to minimum wage and overtime pay for executive, administrative, professional, outside sales, and computer employees. These exemptions are frequently referred to as the “white collar” exemptions.
Employees presently working under the white collar exemption have no right to overtime for work of more than 40 hours
The FLSA’s white collar exemption excludes certain executive, administrative, and professional employees from federal overtime requirements. Before the new rule to qualify for exemption, a white collar employee performing administrative duties, the category most applicable to Agency Checklists’ reader base, had to;
- Be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week; (This number only applies until December 1, 2016).
- Their primary duty had to be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
- Their primary duty had to include the exercise of discretion and independent judgment with respect to matters of significance.
Under the present rule, a white collar employee only has a right to time-and-a-half pay when they put in more than 40 hours a week if they earn less than $23,660 a year ($455 a week).
The new rule will raise every employee’s right to time-and-a-half pay for more than 40 hours work a week if the earn less than $47,476 ($913 a week).
Presently, white collar workers earning between $23,660 a year and $47,476 may be classified as exempt because their primary duties fit within the executive, administrative, and professional services excluded by FLSA. After December 1, 2016, these same workers automatically become eligible for overtime simply because the annual salary falls below the minimum required for the white collar exemption to apply.
Of course, some employers rather than paying overtime may decide to raise employees’ annual compensation, for those employees who earn salaries close to the threshold, over the $47,476 minimum to avoid accounting for and paying overtime. Also, other employees may simply limit the hours worked to 40 hours or less and thereby avoid any overtime issue.
Employee benefits do not count, but some bonuses do, under the new rule
The calculation of earnings under the new rule only includes direct compensation. In the rule-making process, the Labor Department declined to include in the rule’s earning requirement payments for medical, disability, or life insurance, or contributions to retirement plans or other fringe benefits.
The rule specifically provides that such indirect fringe benefit compensation are excluded from any salary level test calculation.
However, the new rule, for the first time, allows employers to count certain, previously excluded, bonuses and commissions toward as much as 10 percent of the salary threshold.
Finally, the new rule also establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the earning levels without regard to inflation and to ensure that they continue to provide useful and effective tests for the exemption to apply.
Labor Department believes new rule will give millions of workers the right to overtime
In the first year, the Labor Department has estimated that 4.6 million workers exempt under the current regulations who earn at least the current weekly salary level of $455 but less than the proposed salary level of $913 would, without some intervening action by their employers, become newly entitled to overtime protection under the FLSA.
Also, the Labor Department estimates that 6 million salaried white collar workers who are currently entitled to overtime due to their job duties, and who earn at least $455 per week, but less than the proposed salary level, would have their overtime protection strengthened because their exemption status would be based on the salary test alone without any need to examine their duties. This, according to the Labor Department, would reduce the number of workers not receiving overtime because of their being improperly classified as exempt from overtime by their employers.