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New Overtime Rule: It Could Have Been Worse!

New Overtime Rule: It Could Have Been Worse! Background Decorative Image

Ordinarily, you might expect that the business community would get pretty upset by a proposed rule increasing the minimum salary required for exempt employees under the Fair Labor Standards Act from $23,600 to $35,308. After all, there are quite a few front line supervisors in fast food restaurants and smaller businesses who earn annual salaries in the low thirty thousands, especially in communities with lower costs of living. The proposed regulation will require employers to start paying these employees overtime or raise their salaries to the minimum threshold.

But as we all know, it could have been much worse. The minimum salary for exempt employees had been expected to double to over $47,476.01 on December 1, 2016, had a federal district judge in East Texas not interfered. The proposed regulation will also allow employers to count non-discretionary bonuses and commissions up to 10 percent of the minimum threshold. For example, if an employee with a base salary of $33,000 also earns a $2,500 bonus, that employee can still be exempt.

Not so positive is the fact that the new regulations will also raise the total compensation requirement for exempt “highly compensated employees” from $100,000 to $147,414. A “highly compensated employee” is one whose primary duty includes office or non-manual work and who customarily and regularly performs at least one of the duties of an exempt executive, administrative or professional employee. Thus, for example, an employee earning just over $100,000 could qualify as an exempt highly compensated executive if the employee customarily and regularly directs the work of two or more other employees, even though the employee did not meet all of the other requirements in the standard test for exemption as an executive. That employee — and there are quite a few of these employees in the fracking industry — will now have to be paid overtime unless his salary exceeds $147,000.

My prediction is that the new regulation is likely to withstand judicial challenge, so employers would be wise to begin assessing how these changes might affect their business — who is being paid how much, do they meet the new threshold, and if not, how many hours, if any, over forty do they typically work? If an exempt employee makes just under the new threshold, it may be cheaper to increase that employee’s salary. Employers also need to make sure to inform their managers and board members about the effect of these new regulations so that no one is surprised when the regulations go into effect.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.