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The New Overtime Regulations: It Could Have Been Worse!

Now they are final. Effective December 1, 2016, any employee who earns a salary of less than $47.476.01 will be entitled to overtime and treated as non-exempt, regardless of their job duties. This is slightly more than double the current $23,660 salary threshold. As I stated in an earlier blog, this is likely to have a greater effect on small businesses and non-profits that often have supervisors and managers who earn salaries in the $40,000 to $50,000 range. Many of my clients in the already distressed oil and gas sector are also likely to be adversely impacted by these new regulations. This won’t reduce the number of layoffs in the Gulf Coast.

Granted, it could have been worse. The original proposal called for an increase in the minimum threshold to $50,400. The “highly compensated employee” threshold will also rise to $134,004, although this change will have less effect on most employers. Employers who use the highly compensated test for exemptions need to examine those cases as well. Additionally, employers will now be able 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 $45,000.00 also earns a $2,500.00 bonus, that employee can still be classified as exempt. Finally, the U.S. Department of Labor (DOL) did not change any of the “duties” tests. Under the new regulations, the compensation threshold will be maintained at the 40th percentile of full-time salaried workers in the lowest income region of the country and will be updated every three years with the first update on January 1, 2020—assuming a new administration doesn’t revisit the regulations before that time.

My general guidance to employers remains the same. First, now that we know what the new salary threshold is, assess how these changes will affect your 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? This will help you understand how much your payroll costs would go up under the new threshold. Second, begin thinking about what you might do to keep your overtime costs down. If an exempt employee makes just under the new threshold, it may be best to increase that employee’s salary. You may want to reconsider allocation of job responsibilities between different personnel or adjust schedules in order to reduce overtime. You may decide that it is smarter to add more employees or reduce fringe benefits in order to justify paying certain employees a higher salary. (Unfortunately, the DOL does not give you credit for providing those benefits.) Finally, make sure your managers and your board members understand the effect that the new regulations may have 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.