Understanding and Applying the New FLSA Overtime Rule

overtime-clock-head-300x225In May, the U.S. Department of Labor (DOL) released its final rule on overtime, modifying the requirements that employers follow to determine whether they must pay an employee overtime. The new rule is designed to protect employees who should be paid overtime and to clarify who is exempt from the overtime rule. About four million workers are estimated to fall under the new rule, which represents a significant payroll processing and wage adjustment burden for some employers.

The New Overtime Rules in a Nutshell

The new overtime rule signed into law by President Obama redefines which employees can be exempt from overtime and which employees must be paid overtime when they work more than 40 hours per week. According to the new rule under the Fair Labor Standards Act (FLSA), employees can only be considered exempt if they make at least:

  • $47,476 annually
  • $913 weekly.

This is a significant increase from the previous rule, which set earning minimums for exempt employees at $23,660 annually or $455 weekly.

Under the new rule, individuals defined as highly compensated employees (HCE) must make at least $134,004 annually in order to be exempt from overtime. For the first time, employers are also allowed to count incentive payments and nondiscretionary bonuses towards base pay. In addition, automatic updates to these thresholds will occur every three years. The DOL says this will help ensure that employees are fairly compensated according to prevailing market rates.

Employees must also meet a rules test in order to qualify for what is known as a white collar exemption. Employees can be considered exempt from overtime under this rule if:

  • They are paid on a salary basis that is not subject to reduction due to the quantity or quality of work,
  • They are paid at least $47,476 annually or $913 weekly
  • Their job duties fall under executive, administrative or professional classifications according to current DOL rules.

How Can Employers Respond to the New Overtime Rule?

Employers have several options to meet the requirements of the new overtime rule. In order to keep pace with the rules, they can:

  • Raise wages to avoid overtime
  • Pay existing salaries plus overtime
  • Redesign labor schedules and duties to maintain wages while eliminating overtime
  • Reduce wages so that employee wages plus overtime are at the same level as pre-rule pay

Labor experts advise employers to implement the new rule before the December 1 deadline. Doing so will help eliminate confusion when calculating overtime and will ensure that companies aren’t at risk for being penalized by the DOL.

Of course, many companies choose to work with a payroll processing partner who can help them implement the new rule without fuss. Companies such as Integrated Payroll Services specialize in this area and understand how the rule can be applied to counting discretionary bonuses and incentive payments such as commissions. Working with payroll specialists is the easiest way for most businesses to avoid confusion about the new rule and come into compliance before the deadline.