What You Need to Know About the New Federal Overtime Ruling

IMPORTANT NOTE 06/09/2017: This article was written when the proposed new federal overtime rule was expected to go into effect in December 2016. Most significantly, that rule by the Department of Labor (DOL) would have raised the exempt salary threshold for white collar exemptions from $23,660 a year to $47,476 a year. In November 2016, a federal judge halted implementation of the proposed new overtime rule.

In December 2016, the DOL filed a notice of appeal to overturn the injunction. While the case is pending, the existing FLSA overtime requirements remain in effect. You can read about what those current requirements are here. We’ll keep you updated when we know more.

This year, the U.S. Department of Labor officially defined the new income threshold for exempt and non-exempt employees. Employers take note: these changes will affect over 4 million U.S. workers, and perhaps some of your own employees.

How Has the Law Changed?

Effective December 1, 2016, employees who earn under $47,476 a year are considered non-exempt and are entitled to overtime pay. Under the Fair Labor Standards Act (FLSA), overtime pay is defined as time and a half for every hour worked over 40 in a workweek. Previously, the overtime threshold for white-collar exemptions sat at $23,600 a year. You can see a more detailed explanation and calculation examples in our previous article about the FLSA.

Looking for a quick outline of the new change? You can check out our short explainer video here.

Which Employees are Exempt vs. Non-Exempt?

Exempt Employees

Employees who qualify as exempt must be paid their full salary for any week they work, regardless of the number of days or hours worked. After Dec. 1, 2016, exempt employees must earn over $47,476 a year, or $913 a week.

The FLSA provides exemption from minimum wage and overtime requirements for:

• Executive employees

• Administrative employees

• Professional employees

• Outside sales employees

The FLSA also exempts certain employees in computer-related occupations. These exemptions are sometimes referred to collectively as “white collar” exemptions. Exempt employees also need to meet certain tests regarding their job responsibilities. These tests were set forth in the Department of Labor’s (DOL) regulations.

For further definitions of these exemptions, you can read more here.

Non-Exempt Employees

Non-exempt employees may receive either hourly or salaried pay. After Dec. 1, 2016, if they earn under $913 a week, they must receive time and a half in overtime pay for all hours worked over 40 in a workweek.

Remember, both federal and state standards govern how to classify members of your workforce. So be sure to check your state’s specific laws to make sure you’re staying compliant.

An Overtime Calculation Example:

Anna is an administrative assistant with a salary of $39,000 a year, or $750 a week. Her base salary breaks down to $18.75 an hour. She was previously an exempt employee and didn’t receive overtime when she worked more than 40 hours a week.

Starting Dec. 1, Anna will be considered non-exempt and eligible for overtime pay. During the first week of December, she stayed at the office 48 hours. Her pay for that week includes her salaried payment plus time and a half for the eight extra hours.

(18.75 * 1.5) * (8) + (750) = $975

Broken down, Anna earned her base pay of $750 a week and an additional $225 in overtime.

What are Some Examples of Exempt v Non-Exempt Workers?

Ted is an electrician for a manufacturing plant and he makes a salary of $65,000 a year. However, his work is considered manual labor and does not fall under the DOL’s white collar exemptions. Ted is a non-exempt employee.

Isabel is a daily columnist at an online magazine and earns $52,000 a year. She fits under the DOL’s “professional” definition, earns above the new threshold, and is salaried. Isabel is an exempt employee.

Alex is an office manager at a small law firm. She earns a $41,000 annual salary and works full time. Although she works in a “white collar” setting, her income is below $47,476 a year. Therefore, Alex will be a non-exempt employee as of Dec. 1, 2016.

How Will the Ruling Change in the Future?

The income threshold that defines exempt status is based on median income percentages across the United States, and will adjust to fit that median every three years. The standard salary level is now set to the 40th percentile of earnings for full-time workers and the 90th percentile for Highly Compensated Employees (HCEs).

How Can Justworks Help?

Our team is aware of the new ruling and is working on a solution to help Justworks members before December arrives. Admins can check out other articles like this one which provide more detail. Product features like our digital time cards will also make entering overtime hours simpler for you and your employees than manually running or calculating payroll.