On May 18, 2016, President Obama and Secretary Perez announced the publication of the Department of Labor’s final rule changing federal overtime rules for Executive, Administrative, and Professional employees under the Fair Labor Standards Act. The change is heralded as automatically extending “overtime pay protections to over 4 million workers within the first year of implementation.” But, what do the new federal overtime rules mean for California employers and employees?
First, Some History on the Federal Overtime Rules
The FLSA requires minimum wages for most workers in the United States. The FLSA sets the floor, and states are free to set higher standards. For the most part, employers in California have to comply with the more strict California rules. In order to be exempt from the federal overtime rules, an exempt employee had to receive a minimum salary of $455 per week. That figured hadn’t changed in years. Meanwhile, in California, most exempt employees must be paid at least $800 per week. Since California’s salary requirement was higher than the federal salary requirement, most California employers didn’t pay much attention to the federal salary test.
In 2014, out of apparent frustration that Congress wouldn’t change the law, President Obama signed a Presidential Memorandum directing the Department to update the regulations defining which white collar workers are protected by the federal overtime rules. The memorandum instructed the Department to look for ways to modernize and simplify the regulations while ensuring that the FLSA’s intended overtime protections were fully implemented. I know what you’re thinking. Putting aside for a moment the fact that the president is part of the executive branch of government with responsibility for enforcing the law, not creating the law, the DOL followed the presidents orders.
Two years later, the Department published a Notice of Proposed Rulemaking and invited interested parties to submit written comments on the proposed federal overtime rules. The Department received over 270,000 comments in response to the NPRM from a variety of interested stakeholders.
Key Provisions of the Final Federal Overtime Rules
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:
- Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. For those of you who have not broken out your calculator, this new salary requirement doubled from $23,660 per year to $47,476 per year.
For the first time since I started practicing employment law (has it really been that long?), the federal salary requirement is higher than California’s salary requirement. The effective date of the final federal overtime rules is December 1, 2016. Future automatic updates will occur every three years, beginning on January 1, 2020. But don’t fret, California employers, with the increased minimum wage requirements recently passed by the California legislature, the California salary requirements were set to exceed the new federal overtime rules as of January 1, 2019.
So, if you are working anywhere in the United States and are exempt from federal overtime, you may see an increase in your wages come December 1, 2016. Happy Holidays! I don’t expect the salary increase to have a significant immediate impact on most California employers since California employers already pay close to the new federal salary requirement in order to ensure the employees are exempt from California’s overtime laws.
Employers and employees should be aware that just paying an employee a salary, even if it is the higher salary required by the new federal overtime rules, does NOT guarantee an employee is exempt from the overtime rules. The employee must still meet the “duties” test, which generally requires the employee to perform exempt or managerial duties. If you have a question about whether you or your employees are truly exempt from the state or federal overtime rules, talk with an attorney familiar with state and federal overtime laws.
Original article by Robert E. Nuddleman of Nuddleman Law Firm, P.C.
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