The U.S. Department of Labor (DOL) announced the highly anticipated federal overtime rule under the Fair Labor Standards Act (FLSA). According to the White House, an estimated 4.2 million white collar workers will become entitled to overtime pay when they work extra hours as a result of the new rule, and wages for workers will increase by $12 billion over the next 10 years. The final rule is effectiveDecember 1, 2016.
The final rule changes the salary level that must be met before an employee can be exempt from overtime. The minimum salary threshold will increase to $913 per week, $47,476 annually, and will apply to nearly all employees — an employee paid less than this threshold amount will be guaranteed overtime pay.
The new federal salary threshold of $47,476 is more than double the current federal threshold of $23,660.
Importantly, it is also higher than California’s minimum annual salary threshold, which is currently $41,600. California employees must earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment to qualify for the so-called “white collar” exemptions, in addition to meeting all other legal requirements for the exemption. This currently amounts to $3,466.67 per month or $41,600 a year based on the $10 an hour minimum wage.
Under the final rule, more California employees potentially will be classified as nonexempt under the FLSA and entitled to overtime because they don’t meet the federal minimum salary threshold. A chart provided by the White House shows that California has the most workers potentially affected of any state — more than 392,000 affected workers. California’s share of the total number of workers affected nationwide is almost 10 percent. The next closest states are Texas and Florida.
Navigating the terrain between California and federal rules can be complicated. Employers must comply with the law that gives the most protection to the employee.
Other key points from the final rule:
- The minimum salary threshold will now be automatically updated every three years — with the first automatic update occurring January 1, 2020. Based on projections of wage growth, the White House stated that the salary threshold is expected to rise to more than $51,000 with the first update.
- The final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the new salary threshold. California does not have any such provision.
- The rule sets the total annual compensation requirement for highly compensated employees (HCE) at $134,004 — up from $100,000; HCEs are exempt almost solely on their salary and are subject to a minimal duties test. There is no HCE exemption under California law.
- The DOL left the federal duties test alone. An employee must meet both the salary threshold and a “duties” test to be exempt from overtime. The DOL sought comments on whether adjustments to the duties test were necessary and whether the FLSA should move more toward California’s duties test. But the final rule left the FLSA duties test as-is.
The announcement comes nearly two years after President Obama first directed the Secretary of Labor to begin creating new overtime rules. The DOL received nearly 300,000 comments on the contentious proposal.
Employers will want to prepare for the December 1 deadline. Although there will likely be challenges to the new rules, it is unknown if any such challenges will succeed. Employers don’t want to get caught out of compliance.
More information, including facts sheets, questions and answers, and small business information can be found on the DOL final overtime rule website.
Content courtesy of CalChamber’s HRWatchdog.