The Department of Labor Changes the Rules for Eligibility for Overtime Compensation

Employment lawyers have been talking about overtime compensation ever since President Obama announced in June of 2015 that he wanted to propose a rule that made a salary of $50,440 as the minimum amount that an employee had to make in order to be deemed by his or her employer as exempt from overtime. Stated another way, President Obama contemplated a scenario where employers had to pay overtime to any and all employees who made less than $50,440 whether that employee was paid by salary or not; whether that employee’s title was manager or not. The final rule has now come out and the minimum salary threshold for exemption from overtime for any employee is slightly less than the initial proposed amount: it is now $47,476. The rule will go into effect on December 1, 2016. Bottom line: if you are an employee who makes less than $47, 476, you must be paid overtime compensation at a rate of 1.5 times your regular rate for any hours worked over 40 during any given week. If you are such an employee, you may find yourself having to use a time clock when you arrive and leave the workplace like an hourly worker. For some, it will come as a shock, especially for those who have titles like manager or assistant manager. If your employer fails to pay you overtime, you have a claim for unpaid compensation that can become substantial in a short period of time and renders liable not only the company but any supervisors who have the power to fire you and/or set your schedule.

But let’s take a step back and understand from a very aerial point of view overtime compensation and exemptions thereto. The correct statement of federal law on compensation (note that there are state laws on compensation with which employers must also comply) is that all employees are owed overtime when they work more than forty hours a week, unless the employer can prove that they qualify for an exemption. The familiar exemptions are for: (1) executive employees; (2) administrative employees; (3) professional employees; (4) computer employees; (5) outside salesperson employees; and (6) highly-compensated employees. Each of these exemptions contemplate employees who are considerably high on an organization’s chart or have a high level of discretion in performing their tasks or have pursued considerable higher education before commencing their profession. In addition to salary requirements, each of the exemptions has requirements in terms of the duties in which each kind of exempt employee primarily engages. While employers have the burden of proving that a particular employee qualifies for a specific exemption from overtime if that decision is ever challenged in a lawsuit, nonetheless, the exemptions have been stretched considerably by companies trying to keep their payrolls in check. Witness the frequent use of salaried assistant managers in retail stores who are required to work more than 40 hours per week. In many instances, they spend the majority of their time performing tasks that hourly employees perform rather than those of a bona fide exempt employee (i.e., stocking shelves or working the register). They do so at a cheaper rate because they are not owed overtime. While the new regulations will not prevent this use (some might say abuse) of assistant managers, it will require employers to provide them with a more generous salary.
So what exactly are the new rules?

1. The minimum salary for exempt employees is increasing to $913 per week or $47,476 per year.

2. The new minimum salary amount will be reviewed and potentially raised every three years, beginning on January 1, 2020.

3. 10% of the new minimum salary amount for all of the exemption categories (excepting that for highly-compensated employees) can be comprised of nondiscretionary bonuses and other incentive payments, including commissions, provided that such payments are made at least quarterly.

4. The minimum threshold salary amount for the highly-compensated employee exemption is now $134,004 rather than $100,000.

In light of the new set of rules regarding exempt employees, employers should confirm that those employees who they view as exempt do, in fact, make the new required minimum salary when the rules go into effect in December. If you are a salaried employee after December 1, 2016 and do not get overtime, confirm that your employer is paying you at least $47,476 per year.

As you can tell from this very brief description of the new rules regarding minimum salaries of exempt employees and the description of who, in fact, qualifies as an exempt employee, this area of the law is potentially very confusing. Because managers who have the power to hire or fire or set work schedules of employees may be individually liable for unpaid overtime compensation, they should spend some time between now and December reviewing and understanding the new rules. Otherwise, they will be giving employees and their lawyers the opportunity for a windfall. In the area of overtime compensation, the pendulum has swung in favor of employees.

If you have any questions about the new Department of Labor rules regarding overtime compensation or more general questions about compensating employees, especially if your business is in New York or Connecticut, feel free to contact one of the lawyers at Cardi & Edgar LLP.

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