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Overtime Regulations Could Change in 2016

On June 30, the U.S. Department of Labor’s (DOL) Wage & Hour Division announced its long-awaited proposal to amend the nation's overtime regulations.  Under the current DOL regulations, in order to be exempt from the overtime requirements, an employee must make at least $455 per week or $23,660 per year.  Any employee making less than that amount must be paid overtime whenever the employee works more than 40 hours in a work week, regardless of the employee’s title or duties.  At the other end of the spectrum, an employee who is paid at least $100,000 per year is exempt from the overtime requirements, regardless of title or responsibilities, so long as his or her primary duties involve office or non-manual work.

Under the DOL’s proposal, both of these dollar amounts would be changed.  The proposed regulations would mandate that starting in 2016, if an employee earned less than $970 per week or $50,440 per year, he or she would be eligible for overtime pay, regardless of the employee’s duties, if the employee worked more than 40 hours in any given week.1  The proposed regulations would also provide that this dollar amount would be adjusted each year so that the dollar amount would remain equal to the 40th percentile of weekly earnings for full-time salaried workers in the U.S.  This means that the overtime threshold would increase over the years as average workers’ salaries increased.

The DOL proposal also would adjust the salary level at the other end of the spectrum.  Beginning in 2016, a highly-compensated employee would have to earn at least $122,148 per year in order to be automatically exempt from the overtime requirements.  Again, this amount would be indexed each year so that it continued to equal the 90th percentile of weekly earnings for full-time salaried workers in the U.S.

Once the new rules were in effect, an employee who made at least $50,440 and less than $122,148, would be eligible to receive overtime pay, unless the employee were exempt from the overtime requirements because he or she was a professional, administrative or executive employee.  In addition, outside sales employees and employees in certain computer-related occupations would be exempt.

What the Proposed Regulatory Revisions Mean for Employers – Including Nonprofits

Currently, with the $23,660 limit, only 8% of salaried workers are eligible for overtime pay.  Initial estimates indicate that a salary increase to $50,400 per year would impact 5-10 million workers, who would now be eligible to receive overtime pay, even if they perform some supervisory functions.  This will increase the number of employees eligible for overtime pay to approximately 40% of the salaried workforce.  Nonprofit organizations are not exempt from the Fair Labor Standards Act or these regulations; just like for-profit employers, they would be expected to comply with these new requirements once they were in place.

Outstanding Issues

In addition to revising the salary thresholds, DOL has left the door open to additional changes, and is seeking comments on a variety of issues.  For example, DOL is specifically seeking comments from the public on:

  • Whether to allow incentive compensation and nondiscretionary bonuses (like production bonuses), to be considered in determining whether the salary-level test is satisfied.  Currently, compensation of this sort is not included when determining an employee’s weekly salary; and

  • Whether to overhaul the overtime exemptions to provide that the exempt employee’s duties must include a minimum amount of time spent performing "exempt" work. The DOL is considering implementing a requirement that an employee must spend at least 50% of his or her time exclusively on supervisory, professional or management duties.  DOL is examining this issue because it has found that employees in lower-level management positions are often classified as exempt supervisors or managers, and thus are ineligible for overtime pay, even though they spend a significant amount of their work time performing nonexempt tasks, such as photocopying, filing and other clerical work.

Bottom line for Nonprofits

The proposed salary revisions would have a significant impact on nonprofit operations, and it is essential that organizations begin considering the impacts this proposal might have on their 2016 budgets and grant requests.  It is currently anticipated that the proposed changes will become final by this time next year.  Once the rule is finalized, the time period until it becomes effective is unlikely to be significant.  In 2004, the last time these regulations were amended, employers only had 120 days to comply; a similar or shorter timeframe is expected next year.

With the expected lack of lead time, employers will need to start planning well in advance.  For example, it will be necessary to budget for – and seek funding for -- salary increases and/or increased overtime costs for at least part of 2016.  In order to make informed decisions with respect to budgeting, employers will need to complete a preliminary assessment of the positions that may be impacted by the changes, and determine whether the duties performed by the positions would qualify for the exemption.  It may be necessary to reclassify or reorient certain positions to make them either fully exempt or non-exempt in order to avoid or minimize overtime obligations.  

1) Certain professional employees are not covered by the minimum earnings test. These include lawyers, teachers, doctors, academic administrative personnel and outside sales workers. They are exempt from the overtime requirements if they otherwise meet one of the tests for being an exempt employee.