The New Overtime Rule Explained —in Plain Language
Are you ready for the "new overtime" rule? If you're a practice owner, a physician partner, or a practice manager, you know that the Department of Labor (DOL) is increasing the minimum salary level for employees who can be exempt from overtime pay. But you may not know all the nuts-and-bolts of this new rule, and the DOL certainly hasn't made it easy for you—its "Final Rule" on the subject is a 508-page document filled with governmental and bureaucratic jargon.
Also, you must comply by December 1, 2016, when the overtime rule goes into effect. Experts predict that after this date, auditors will be sharpening their red pencils and hiking up their number of small business audits. So, time is short. And chances are, you don't have time to read all 508 pages of the Final Rule.
Here, we break down the basics for you, in plain language.
Why the change?First, know that this rule is a change under the Fair Labor Standards Act (FLSA), which hasn't been properly revised in decades. "The white collar exemption was originally meant for highly-paid workers who had better benefits, job security, and opportunities for advancement," according to the DOL. However, as inflation has increased, the minimum salary for overtime exemption hasn't kept pace, so more and more employees have been working overtime hours without being fairly compensated with overtime pay. The Final Rule is meant to correct this disparity.
Who's included?This change mostly affects so-called "white collar" workers, including executive, administrative, and professional employees (EAPs) paid on a salary basis. Take note that in this context, "administrative" employees aren't meant to include administrative assistants, office clerks, etc. In the DOL's language, "administrative" refers to executives/managers of the business's administration—those whose job involves "the exercise of independent judgment and discretion about matters of significance." Also, "professional" employees whose work requires advanced education or training—including doctors, lawyers, many registered nurses, and other such professionals—are automatically exempt from being paid for overtime.
How does it work?Starting December 1, the Final Rule raises the overtime exemption threshold to $47,476 a year ($913 a week)—more than double the existing threshold of $23,660 a year ($455 a week). This means that EAP employees (as defined by the DOL) who are paid a salary of $47,476 or more will not have to be paid overtime. But workers who earn less than $47,476 annually will be eligible to receive overtime pay ("time and a half" per hour) for any work beyond 40 hours a week. Bear in mind that this exemption applies only to "white collar" EAP employees—a secretary or a "blue collar" worker who earns a salary of $48,000, for example, will need to be paid for any overtime.
What does this mean for employers?
If you have an employee who earns more than the existing $23,660 exemption threshold but less than the new $47,476 threshold, then you have a tough decision to make before December 1. You must choose one of four options:
Raise the employee's salary to the $47,476 exemption status. You'll be paying more but you won't have to pay this employee overtime. However, this salary threshold will be automatically increased every three years. The new rule also allows employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10% of the exempted employee's salary, which amounts to $4,747.60 per year ($91.30 per week).
Maintain the employee's current wage but be sure to pay this worker time-and-a-half for any overtime beyond the standard 40-hour work week, as required by FLSA.
Adjust (i.e., lower) the employee's current salary/hourly rate and reallocate it to overtime pay, such that the employee ends up earning the same amount. (However, employers can't continually adjust wages each workweek in order to manipulate the regular rate, nor can they lower an employee's hourly wage below the minimum wage.)
Limit the employee's hours to no more than 40 per week. (If necessary, hire additional temporary or part-time employee(s) to get the work completed.)
So, which is the right option for your particular employee(s)? Fortunately, you don't have to figure it out all on your own. Several sites now have calculators to help you estimate whether you'll spend more by raising a specific employee's salary to exempt status or by keeping the employee's wages as-is and paying for overtime. (ADP, the national payroll company, has a calculator on its website, as does the HR advisory firm CEDR.)
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