You Mean I Get Overtime? Unbuttoning the White Collar Exemption

Unbuttoning the White Collar Exemption … a bit

A Friday paycheck in hand – or more likely watching the figures hit your bank account through direct deposit – is always a welcome feeling. You put in a long week of work and then comes the remuneration … minus what Uncle Sam keeps for himself, of course.

No matter how much we make, we all could use help with those unexpected emergencies, a kid’s birthday, or to justify that dinner you splurged on last week. The root of all evil or not, money is a concern for everyone; and after December 1, 2016, wage earners may have a little more jingle in their pockets due to significant changes to employee overtime benefits.  Meanwhile, employers will be forced to make some crucial business decisions. 

The Department of Labor recently released its final ruling on changes to the Fair Labor Standards Act (FLSA) which, among other things, governs the overtime requirement for employers. 

The FLSA currently requires employers to pay employees at least the federal minimum wage plus “time and a half” for all hours worked over 40 hours in a work week (overtime). These regulations began in 1938 and were intended to ensure that all workers are paid a living wage and to limit the number of hours that an employee can work without additional compensation. 

But overtime requirements do not apply to everyone. Salaried employees that earn over a certain salary threshold are exempt from overtime compensation. This exemption is commonly referred to as the “white collar exemption.”  To determine if an employee meets the white collar exemption, he/she must: 

1)Be paid on a salary basis, 

2)Earn above a certain salary threshold, and 

3)Have job duties that involve executive, administrative, outside sales, or professional duties (or be a “computer employee”). 

Since 2004, the minimum salary threshold for the white collar exemption was $455 per week, or $23,660 per year. With the recent changes to the FLSA, that minimum salary threshold will be increased to earnings of $913 per week, or $47,476 per year.  Simply put, employers will pay overtime to all salaried employees whose weekly salary is $913 (or less) for all hours worked exceeding 40 hours per week. The new threshold was calculated based on the 40th percentile salary of full-time employees in the lowest-wage census region in America, currently the South. This is a monumental shift, which the United States Department of Labor estimates could initially affect over 4 million salaried employees.

Not only do the new regulations increase the current white collar exemption threshold, they will also require the salary and compensation levels of the FLSA to be updated every three years so that the minimum salary levels will remain consistent with 40th percentile of the lowest-wage census region. The first update will take place in January, 2020. 

As with any news, there is some good and some bad. Employees who may not have previously qualified for overtime may see an increase in their compensation or a change in their working hours. On the other hand, employers will be faced with decisions that may substantially affect the future and profitability of their business. The updated regulations will require business owners to make some important strategic decisions, such as:  

•How to stay profitable with these new regulations? 

•How many employees can they afford to retain and/or hire?

•Is it more economical to pay for the additional overtime or to increase the employee’s salary over the minimum salary threshold? 

And the employers’ conclusion may not be a one-time decision. Due to the updating requirement, an employer may face this conundrum every three years as these regulations are updated. 

There are additional changes in the updates to the FLSA, such as amendments to the highly compensated employees (HCE) threshold – which are not covered in this article. Employers should be planning for these changes now; and should start discussing these updates and the impact that they may have with a trusted professional. While it is not certain what the long-term impact these changes will have on employees or employers, it is certain that on December 1, 2016 there will be some change … and not just the kind that jingles.