On May 18, 2016, the U.S. Department of Labor Department (“DOL”) issued the final version of the overtime exemption rule.  The much-anticipated federal rule raised the minimum salary threshold required for an employee to qualify for the “white collar” exemption from overtime to $47,476 per year ($913 per week), up from $23,660 ($455 per week). Now, if an employee makes under $47,476, they are subject to federal overtime laws. The rule will take effect December 1, 2016.

“White collar” employees are those employees who are paid on a salary basis who perform primarily executive, administrative or professional duties. The new rule calls for permanently raising the “white collar” exemption equal to the 40th percentile of weekly earnings for full time, salaried workers in the U.S’s lowest income census region (which is currently the South). This amount is currently estimated at $913 per week.

Further, because the federal rule requires an employee meet a minimal duties test to be included under the “white collar” exemption, employees who make over $47,476 per year may still be eligible for overtime pay. “Highly Compensated Employees” who pass the test are exempt from overtime; those who do not may still qualify for overtime. Under the new rules, the salary limit for Highly Compensated Employees, which must be equal to the 90th percentile of full time salaried workers nationally, increased to from $100,000 to $134,004 per year.

These salary thresholds will be evaluated every three years, beginning January 1, 2020. The evaluation is necessary to guarantee both exemption levels remain at the 40th and 90th percentiles to which they will now be pegged. The 40th and 90th percentiles are currently estimated to reach $51,168 and $147,524 in 2020, respectively.  Additionally, the DOL provided employers a well-deserved gift by allowing employers, for the first time, to count bonuses and commissions toward as much as 10% of an employee’s salary.

According to the DOL, the new rule is expected to require that overtime be paid to an additional 4.2 million workers who are not currently eligible for overtime protections under federal law. While many agreed that it was time to increase the salary threshold, this dramatic jump requires employers to make tough business decisions concerning employee classification. Employers will have to decide whether to reclassify previously-exempt employees as nonexempt or give those employees raises to maintain their exempt status. Employees who are reclassified as nonexempt hourly workers may not be happy with the change as their previous flexibility (i.e. taking off early from work or working at nights/weekends) may become more closely managed. There is speculation among the legal community that Retail and Hospitality will be the most affected industries, as those industries tend to have a higher proportion of lower-paid management.

COUNSEL TO MANAGEMENT:

California employers will want to know whether state or federal law will apply to their business. Under California law, employers must comply with the law which is most favorable to employees. Currently California’s salary basis exemption is two times the applicable minimum wage based upon a 40 hour work week. [$20 x 40 hours = $800/week or $41,660/year].

Once this new rule goes into effect on December 1, 2016, the federal rule will govern. However, when California’s minimum wage reaches $12.00 per hour on January 1, 2019, California’s salary basis will exceed the federal standard, meaning California law will again govern. When the federal standard potentially increases on January 1, 2020, reassessment will be needed to determine which law applies.

For agricultural employers, employees exclusively employed in agriculture are exempt from FLSA’s overtime provisions and this new rule will not apply. FLSA still requires employers of agricultural workers to keep time records for employees who do not meet the requirements for overtime under FLSA, and all applicable California overtime rules still apply. Please contact the Saqui Law Group with any questions regarding overtime compensation.

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