After much anticipation, the Department of Labor finalized its new overtime-compensation rule on May 18.
The final rule, which goes into effect on Dec. 1, solidifies a long-overdue revision of America’s overtime compensation policies. Since the 1970s, the number of people who receive compensation for hours worked in excess of 40 per week has fallen dramatically. This is in large part owed to the government’s failure to keep the minimum salary standards for exemption from overtime compensation in line with current wage rates and inflation. By raising the salary standards closer to what they were in the 1970s, the new overtime compensation policy affords greater protection to salaried workers across the country.
The Fair Labor Standards Act, 29 U.S.C. §§ 201-219, sets out the requirements for overtime compensation in the U.S. At its most fundamental level, the act, often referred to as the FLSA, requires employers to pay workers an overtime rate for hours worked in excess of 40 a week.
However, the FLSA also creates exemptions to its overtime requirements for executive, administrative and computer employees. The FLSA does not define these exemptions but instead leaves that task to the Secretary of Labor’s discretion. As a result, the Department of Labor has set a baseline salary threshold for individuals to qualify for one of the three exemptions.
Unfortunately, the Department of Labor’s salary threshold for overtime compensation has been set too low for too long. In 2004, the salary threshold was set at $23,660 a year, or $455 a week. This was the first update to the threshold since the 1970s. The government’s failure to maintain overtime compensation standards has resulted in fewer and fewer salaried workers qualifying for overtime compensation.
The new rule reverses the trend of denying overtime wages to salaried workers in two critical ways. First, the new rule increases the salary threshold to the 40th percentile of earnings for salaried, full-time workers in the lowest-wage Census Region. This means that on Dec. 1 the salary threshold to qualify for an executive, administrative or computer employee exemption rises to $47,476 a year, or $913 a week.
Second, the new rule creates a process for automatically updating the rules every three years to better ensure that the salary thresholds keep up with inflation and wage rates.
By increasing the salary threshold for the executive, administrative and computer exemptions, the new final rule aims to reduce the number of low-wage salaried workers who are being illegally or unfairly denied overtime compensation. Under the current rules, many employers have used the minimal salary threshold and lax exemption definitions as a way to avoid making overtime payments to salaried workers.
In fact, the new rule is expected to increase the number of salaried workers receiving overtime compensation by 4.2 million. To comply with the new requirements, employers will be required to pay overtime to their non-exempt workers or increase salaries to meet the threshold.
Rules leaves room for avoiding overtime
The Department of Labor’s final rule does leave room for employers to continue to avoid fairly compensating their salaried workers. For example, the new rule allows discretionary bonuses and commissions to be counted for up to 10 percent of the minimum salary required to obtain an overtime exemption. This means that employers can pay employees a lower base salary and still meet the salary threshold through commissions and bonuses.
Additionally, employers are able to continue illegally misclassifying employees under the confusing “duties test.” Under the current rule, the job duties required for someone to qualify as an executive, administrative or computer employee are not clearly defined.
As a result, employers can often illegally misclassify employees to avoid paying overtime wages. This problem has only been exacerbated by courts’ inconsistent application of the duties test. Regrettably, the Department of Labor chose not to clarify this test in its final rule. Therefore, opportunities for the illegal misclassification of salaried employees are still common.
While the lack of clarification of the “duties test” leaves employees at risk of misclassification, the Department of Labor’s final rule does represent a significant shift in overtime policy. Similarly, it is important to not overlook the millions of Americans who will gain access to overtime compensation as a result of the new rule. While there is still a long road ahead, this is a step toward achieving fair overtime compensation for all workers.