Next Steps: Final Overtime Rule

May 25, 2016

AA017956On May 18, the U.S. Department of Labor (DOL) issued the final version of a much-anticipated overtime exemption rule, raising the minimum salary threshold required to qualify for the Fair Labor Standards Act’s (FLSA’s) “white collar” exemption to $47,476 per year, which will automatically extend overtime pay to more than four million workers within the first year of implementation.

Under the existing rule, which has been in effect since 2004, employees must be paid a minimum salary of $455 per week ($23,600 annually) to qualify for the “EAP” – executive, administrative, professional – exemptions from the FLSA’s overtime requirements. Under the new final rule, the salary level will increase to $913 per week ($47,476 annually). Beginning Jan. 1, 2020, the salary level will update automatically every three years to the 40th percentile of full-time salaried workers in the lowest-wage U.S. Census region. The DOL estimates that this figure will be $51,168 in 2020. However, the final rule will allow up to ten percent of the salary level threshold to be met through the payment of non-discretionary bonuses, incentive pay, or commissions. In order for these payments to count towards the salary level, they must be made on at least a quarterly basis.

The final rule also updates the total annual compensation level above which Highly Compensated Employees (HCE) are ineligible for overtime. The new level is $134,004 per year, which is up from the current $100,000 per year. The HCE threshold will automatically increase every three years to the 90th percentile of full-time salaried workers nationally, which the DOL estimates will be $147,524 in 2020.

Now that the final rule is out, litigation and legal remedies are expected to follow shortly—with arguments mostly likely being centered on whether or not the DOL has the legal authority to imbed an automatic threshold increase based on a cost-of-living measure. The DOL has never included a cost-of-living adjustment in the overtime regulations and some argue Congress did not empower the agency to do so.

Additionally, there will be pressure for lawmakers to invoke the Congressional Review Act (CRA), which gives Congress 60 legislative days to pass a “Resolution of Disapproval” on rules or regulations finalized by various agencies. Senator Lamar Alexander (R-Tenn.), Chairman of the Committee on Health, Education, Labor & Pensions (HELP) has already said he plans to introduce a resolution to block the final overtime rule under the CRA. However, this method is rarely utilized and if there is enough support to pass the legislation and disapprove the rule, it would still have to be signed into law by the president, which is highly unlikely since this has been a priority for his administration.

It is also possible that lawmakers opposed to the rule may include language to combat it in upcoming FY 2017 appropriation bills. Some lawmakers may try—through the appropriations process—to freeze funding and prohibit DOL from enacting and enforcing the rule. This approach seems unlikely because the appropriations process entails thousands of budget items that eventually get negotiated between the House and Senate and then with the administration.

In the meantime, since the final rule makes fairly drastic changes to the FLSA, employers will now have to consider a number of legal and practical strategies in implementing the new regulation.  First, employers will have to conduct a self-audit to determine who will be affected by the final rule.  Employers will have to consider whether to continue to treat affected employees as exempt and raise their salary to the new mandatory minimum, or to allow the employee to become eligible for overtime pay.  The final rule may also necessitate review and revisions to employer overtime policies.

NSBA supports and has been urging Congress to pass the Protecting Workplace Advancement and Opportunity Act (S. 2707 and H.R. 4773), which would nullify this rule and require DOL to perform an economic analysis of how changes to overtime regulations will impact nonprofits, small businesses, and employers in other vulnerable industry sectors before issuing a new rule. The bill would also prohibit any future proposal from including any automatic update mechanism. Both bills are currently pending in their committees of jurisdiction – the House Committee on Education and the Workforce, and the Senate Committee on Health, Education, Labor, and Pensions (HELP). Yet even if they pass through their respective chambers, the president will inevitably veto the bills. When first proposed, NSBA submitted comments, please click here to view NSBA’s comment letter.