New Rule Changes to the Fair Labor Standards Act Affect Millions of Employees

Yarelyn Mena

Last year, on June 29, 2015, the Department of Labor and President Obama announced a proposed rule change to the Fair Labor Standards Act (“FLSA”) that would increase the number of Americans eligible for overtime pay by increasing the salary threshold for overtime from $23,660 to $47,470. On May 18, 2016, the Obama administration issued the official rule changes, which goes into effect December 1, 2016.

The FLSA requires that employers pay certain employees overtime. Specifically, employers must pay eligible employees overtime for all hours worked above forty each week, at a rate of one and a half times their normal rate. Not all employees are entitled to overtime under the FLSA; for example, employers do not need to pay overtime to administrative, executive, or professional employees. Employees who are not entitled to overtime pay under the FLSA are “exempt.” However, the FLSA also creates an exception to these exemptions: if the employee earns less than a certain salary threshold – currently set at approximately $23,660 per year—then the employee is entitled to overtime pay no matter what their job duties.

The salary threshold was last adjusted decades ago. Since then millions of jobs that were once eligible for overtime have become exempt, primarily due to inflation. The new rule sets the standard salary level at the 40th percentile of earnings of full-time salaried employees in the lowest-wage region which is $47,476 annually for a full-time worker. This increase more than doubles the salary threshold but is slightly less than the amount of $50,400 initially proposed. The rule also establishes a mechanism for automatically updating the salary and compensation levels of employees to ensure that the salaries are at the higher ranges of the percentile and to reassess tests to determine exemption status. Additionally, the final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. With these changes, the Department of Labor anticipates that about 35 percent of full-time salaried employees will be eligible to earn overtime pay; experts anticipate that more than four million employees will become eligible for overtime when the rules go into effect.

The overall effect that this rule change will have on the workforce is difficult to predict. Many employers rely on exempt employees to work long hours, so requiring those employers to pay their employees overtime could result in several different scenarios: the employer may decide to cap an employee’s workweek at forty hours and hire additional workers, providing more free time to existing workers and creating additional jobs; the employer may decide to simply pay their employees more, resulting in significantly more take-home pay for their existing workers; the employer may decide to scale back and cap an employees working hours without hiring extra help; the employer could try to shift work to independent contractors or other workers that were not covered by the FLSA; or, the employer could decide to give their previously exempt employees a raise to more than $47,476 per year, so that they are again overtime exempt. All of these likely outcomes benefit workers.

If you think that you have been denied overtime pay, contact The Harman Firm, LLP.