Photo by: Department of Labor

The Department of Labor recently approved changes to the overtime rules under the Fair Labor Standards Act (FLSA) that will have a significant impact on California employers and workers. According to the Department of Labor, the new rules will affect over 300,000 California workers who will either be entitled to overtime pay or receive raises to maintain their exempt employee status.

Here are some answers to commonly asked questions about the new rules.

Who is affected by the new rules?

Employees who are exempt from minimum wage and overtime pay protections under the executive, administrative, and professional (EAP) exemption and the highly-compensated employee (HCE) exemption of the FLSA. (Learn about exempt vs non-exempt employees.)

The FLSA covers a majority of workers. Details on who is covered by the FLSA are available from the Department of Labor.

What are the changes made by the final rule?

• In addition to meeting the duties test, in order to meet the EAP exemption requirement, the employee must receive a salary of at least $913 per week or $47,476 annually.
• HCEs must receive $134,004 annually to meet the exemption requirement.

May bonuses and incentive pay be credited toward the threshold salary requirement?

 Yes, to a certain extent.

Employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. To do this, the payments must be paid on at least a quarterly basis and permits employers to make a “catch-up” payment at the end of the quarter.

HCEs must still receive at least $913 per week on a salary or fee basis, which may not be made up of nondiscretionary bonuses and incentive payments. However, those incentive payments may be credited toward the remainder of the standard salary level to meet the $134,004 threshold for the exemption.

Did the duties test change?

No. The duties test remains the same.

When do the changes go into effect?

December 1, 2016.

This gives employers 6 months (from the date of this article) to determine:

• which employees will be affected by the new rules,
• whether to give those employees a raise to maintain their exempt status,
• whether to keep salaries as they are and pay overtime rates for overtime hours worked,
• whether to revise written overtime policies, and
• what other business decisions are necessary to meet the business’s needs.

Will these thresholds change again?

Yes. These salary thresholds will be automatically updated every 3 years beginning on January 1, 2020.

What options do businesses have in responding to the new overtime rules?

Employers have a range of options for responding to the updated standard salary level. For each affected employee newly entitled to overtime pay, employers may:

• increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
• pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked;
• reduce or eliminate overtime hours;
• reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or use some combination of these responses.

PRACTICAL TIP: If you are a business owner, you may want to identify the positions that may be impacted by the change and assess the financial impact on your business if you had to pay these employees overtime versus increasing their salaries. Employers should also take this time to determine how much lead time will be necessary to implement any changes by your payroll and timekeeping vendors and assess whether training regarding timekeeping practices and general management of newly reclassified non-exempt employees would be beneficial and prepare accordingly.

Contact me at (949) 529-0007 if you have questions about paying employees.

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