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Home Blog The FLSA Overtime Rules: What Every Business Needs to Know


FLSA Overtime Rule

As you may be aware, the Department of Labor issued its updates to the Fair Labor Standards Act (FLSA) overtime provisions on May 18, 2016. This Final Rule raises the “white collar exemption” to $47,476 from $23,660 per year.

These changes are ones that many organizations, whether for- or not-for profit (e.g., hospital based), will have to incorporate into their business planning. The FLSA only applies to employers that have gross volume sales greater than $500,000; hence, some smaller companies may not be affected. It’s important to note that all hospitals and “businesses providing medical or nursing care” are automatically covered under the FLSA, regardless of sales. 

Let’s begin with a common mantra I’ve seen in various posts that suggest something to the effect of “it all sounds fair…don't these ‘exempt’ lower-wage workers deserve to get paid overtime”?

President Obama certainly thinks so. But, critics of the proposal argue that it remains to be seen whether the higher threshold will boost as many paychecks as the White House is hoping for.

"Very few people will benefit at all and only a very small percentage of those who are affected are actually in poverty," according to Ben Gitis, director of labor market policy at the American Action Forum. "That is because most salaried employees who work more than 40 hours each week actually earn more than any feasible new salary level test."

Will employees actually earn more?

So, how many workers will actually earn more money?

A study commissioned by the National Retail Federation (NRF) estimated that industry employers would convert about a third of the affected workers to hourly status and about one-fifth of all workers would get about $10,000 in overtime pay.

But, the study predicted that companies would likely simply cut base wages to make up the difference and that about 10 percent of workers would see their overall hours reduced, cutting their overall pay. Employers would also likely reduce bonuses and benefits to offset the higher cost of overtime, the authors of the NRF study said.

"Employers would likely hire more part-timers to do that work and cut base pay and benefits to keep peoples' compensation the same overall," the NRF said. "Meanwhile, companies might have to cut down on the number of managerial jobs they offer, making it more difficult for employees to climb the professional ranks and leading to more inequality in the workforce, not less."

Rule based on Depression-era law

President Obama wrote in an op-ed published on the The Huffington Post that he “initiated this effort to boost earnings for Americans at the bottom of the income ladder. We've got to keep making sure hard work is rewarded. That's how America should do business. In this country, a hard day's work deserves a fair day's pay."

Is this true?  Well, a lot depends on how employers react to the new guidelines. Here's why.

The rules are based on a Depression-era law, the Fair Labor Standards Act, that says if you work more than 40 hours a week, you get 1.5 times your usual pay rate. (The law was originally intended to protect factory workers and restrict child labor.) But under the law, managers and professional workers who earned high salaries and performed certain types of work were exempt from overtime. However, the salary threshold used to determine who is exempt hasn't kept up with inflation.

Proponents of the change, like the Economic Policy Institute, which advocates for low-income households, contends that millions of low-wage workers in fast food, retail and other industries are designated as "managers" to avoid paying them overtime. Based on the current threshold, any salaried worker making more than $455 a week – or $23,660 a year – can be called a "manager" and be exempt from overtime pay.

The White House estimates that up to 5 million workers will be helped, some 56 percent of whom are women and 53 percent with a college degree. To keep up with inflation, the new threshold would be pegged to the 40th income percentile. That would help keep future low-wage workers covered, according to the Economic Policy Institute. The group estimates that only 8 percent of low-wage workers are covered today under the current salary threshold, down from 62 percent of workers in 1975.

Wage threshold more than doubles

The current salary threshold for the white collar exemption was last set in 2004. At its current rate of $455/week, or $23,660/year, it is below the 2015 poverty line for a family of four. The DOL has chosen to set the new threshold at the 40th percentile of earnings of full-time salaried workers in the lowest wage Census Region. This results in a new wage exemption of $913/week, or $47,476/year. 

And, for the first time, employers will be allowed to count a portion of non-discretionary bonuses, commissions and incentive payments towards this amount. The Final Rule allows for payments of this kind to make up to 10 percent of the standard salary requirement as long as these types of compensation are paid at least quarterly. Salaried and hourly workers paid below the threshold amount are generally eligible for overtime when they work more than 40 hours per week.

Employees paid above this amount may be exempt from overtime provided they pass the “exemption tests.” FLSA regulations have always required employers who want to exempt an employee from overtime to apply three tests in order to confirm they can be excluded:

  • Salary Basis Test: The employee must be paid a pre-determined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
  • Salary Level Test: The amount of salary paid must meet a minimum specified amount (under the Final Rule: $913/week, or $47,476/year).
  • Duties Test: The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations. These tests involve assessing the level of independent decision making, management of business activities, direction of others’ work, specialized training and/or scope of authority involved in the day-to-day performance of work. Employees must pass each prong of the test in order to satisfy the duties test. Additional information about the duties test can be found here. The FLSA will not be making changes to the Duties Test under the Final Rule.

Who is most affected?

So…what types of workers and in what industries are most affected? According to the NRF study, it is first-line supervisors and managers in, as you might expect, food service and sales.  

What about my business?

Assuming you have gross volume sales greater than $500K, you have until December 1, 2016, to assess the effect the rules will have on your business and review/implement a strategy to apply to them. 

Organizations that have employees falling under the new salary threshold and are now eligible for overtime will now need to have a time-tracking system in place that accurately records work hours to protect against FLSA violations. While the rules allow for much flexibility in that they require no specific method for time tracking, the system that is used “must be accurate and correctly account hours for regular and overtime pay.”   

Each organization does have some flexibility in how they want to address the impact the Final Rule has on their business operations:

  • Employees that fall under the threshold can continue to work over 40 hours per week and be paid at the overtime rate.
  • You can limit to 40 the number of hours that employees eligible for the white collar exemption work order to limit the amount of overtime that will be paid. Those employees that remain exempt from overtime may need to pick up the remaining work in order for your business needs to be met.
  • Job descriptions can be redesigned to take into account the new FLSA regulations; workloads, schedules and duties can be adjusted accordingly to take into account the expected activities of exempt and non-exempt workers.
  • Employees close to the $47,476 threshold may receive a compensation increase in order to continue to work overtime without the need to be paid for it.

Another issue: Organizations that need to reclassify overtime exempt workers as non-exempt may have to contend with morale issues because being an exempt-level employee is sometimes seen as a sign of achievement by an individual and recognition of the level of work that they are performing. You may need to create talking points to mitigate potential employee relations issues and confirm to the employee that the reclassification is the result of federal regulations and not a lack of confidence in the employee or their abilities.

So, to start you will need to examine your employee compensation and determine who is affected. The impact of the strategies for managing the changes to the FLSA need to be mapped out now so that your business is prepared to navigate the changes on all of these fronts.

The types of workers affected by these regulations will vary among companies, but many will fall under a general descriptor of “lead, “manager” or “supervisor” with common examples such as:

  • Lead customer service representative
  • Purchasing manager
  • Operations manager
  • Retail manager
  • Warehouse/distribution manager
  • Billing/reimbursement manager
  • Lead therapist
  • Clinical rehabilitation specialist

Realistic Perspective

In reality, however, it is unlikely that all of these workers would see their take-home pay improve simply because they gained the potential to earn overtime pay. More so, in the wake of changing regulations, many employers will consider a variety of strategies to reduce the additional labor costs in order to remain competitive in today’s turbulent environment.

Indeed, in my analysis of relevant academic research and interviews with industry experts, indications are that many employers will be adjusting compensation schemes to ensure they do not absorb additional labor costs. To do this they might:

  • Lower hourly rates of pay to leave total pay largely unchanged;
  • Cut bonuses and benefits in order to increase base salaries above the new threshold;
  • Reduce some workers’ hours to fewer than 40 per week in order to avoid paying overtime, cutting compensation proportionally.

And, as the NRF study noted, lower-level employees, currently covered by overtime law, might find it harder to rise into the managerial ranks as the number of midlevel salaried positions contract. Companies might encounter difficulties developing talent and promoting internally because of a narrower pipeline.

According to numerous analysts, raising this threshold appears to do little to actually boost worker compensation. However, the rules will certainly impose new costs on businesses, many of whom would have to update their payroll systems to convert salaried employees to an hourly rate, track time, field employee questions and end incentive payments or bonus pools for many workers now eligible for such payments. Oxford Economics estimates this will cost U.S. employers nearly a billion dollars. 

In any case, I would welcome comments and input from our valued member companies. I am most curious as to the extent these regulations might alter actual operations and/or how you plan to respond to the changes in the overtime threshold. Questions about the Rule? Contact me at or 888.224.1631.

Article by Mark Higley, vice president, VGM Regulatory


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