Payroll Update

Payroll Update

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Final overtime rule from Department of Labor

The Federal Department of Labor (DOL) finalized a rule (Final Rule) on May 18, 2016 involving a new white collar exemption threshold of $47,476 a year for employees who currently work in positions and perform duties meeting any of the three white collar exemption classifications (Executive, Administrative, Professional). This is more than double the current level of $23,660 a year which has remained unchanged for over 10 years, with the last update occurring in 2004.

When an employee is classified as white collar exempt (exempt), it means the employee is paid on a salary basis of at least $23,660 per year ($455/week), and duties they perform meet the duties test, therefore exempting the employer from being required to pay them overtime for all hours worked over 40 in a given work week.

This change will affect any employee currently classified as exempt earning a salary between $23,660 and $47,475 per year. The employer will need to make a decision as to increasing the employee's salary to $47,476 per year or change their classification to non-exempt and begin paying the employee overtime for all hours worked over 40 in a given work week. (Note: State laws still apply and employers should also monitor state laws to ensure compliance if the state law is more beneficial than the Federal DOL laws.)

The announcement was made by President Obama and Labor Secretary Perez on May 18, 2016. This announcement means that full-time employees earning up to the new $47,476 threshold a year will be eligible for overtime pay. The Final Rule also allows for future increases every three years beginning January 1, 2020 based on wage growth over time. Over 270,000 comments were considered by the DOL in drafting this rule.

The DOL estimated the new threshold rule will directly impact approximately 4.2 million workers who are currently not eligible for overtime, by forcing either a compensation increase or allowing for overtime amounts to be paid. The Final Rule will also indirectly impact 8.9 million workers (3.2 million blue collar and 5.7 million white collar workers) who are currently overtime-eligible but whose salaries are above the existing threshold. These are workers whose duties do not meet the exemption for executive, administrative or professional workers - but under the Final Rule, they will be overtime-eligible as their salaries will fall below the new threshold and no "duties test" assessment is needed.

The effective date of the Final Rule is December 1, 2016. The primary focus of the Final Rule is updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt from overtime. The Final Rule:

  1. 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). This means that 35% of full-time salaried workers will be automatically entitled to overtime pay based on their salary.
  2. Sets the total annual compensation requirement for highly compensated employees subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally to $134,004 (from the current $100,000); and
  3. 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.

In addition, the Fact Sheet provided by the DOL will allow employers to use bonus payments to account for as much as 10% of the new $47,476 annual salary amount. Currently, employers are not allowed to use bonus payments for the existing threshold of $23,660. These payments are comprised of non-discretionary bonuses, incentive pay and commissions, provided these payments are made on at least a quarterly basis.

Note that the Final Rule does not change the "duties test" (to ensure the work the employee is performing meets the rules Congress meant to exclude from overtime protections) nor the "salary basis test" (if the salary is above the threshold) to determine which employees are exempted from overtime pay. Thus, white collar salaried workers earning above the new salary threshold are still subject to the "duties test" in determining if they are eligible or ineligible for overtime pay.

The Fact Sheet also indicated the DOL will issue three technical guidance memos to assist private employers, nonprofit employers and institutions of higher education on complying with the Final Rule.

The Overtime Overview document from the DOL stated that the Final Rule was a response to the overtime exemption of certain white collar workers: "The passage of the Fair Labor Standards Act gave most Americans the right to a minimum wage and time-and-a-half pay for more than 40 hours of work in a week. These rules apply to most hourly and salaried workers, but not to some white collar workers whose salaries and duties exempt them from the overtime pay requirement. ... The rule will entitle most salaried white collar workers earning less than $913 a week ($47,476 a year) to overtime pay. This long-awaited update will provide a meaningful boost to workers, and it will go a long way toward realizing President Obama's commitment to ensuring every worker is compensated fairly for their hard work."

The Overtime Overview document also stated that the Final Rule is intended to put more money into the pockets of middle class workers (approximately an extra $1.2B a year) as employers may increase salaries to the new threshold or pay overtime premium for hours over 40 per week. It can also lead to employees working only 40 hours per week, thus giving them more free time for personal or family pursuits (work-life balance).

As mentioned earlier, this should also lead to more clarity for employees and employers vis-à-vis the overtime exemption since the employees' salaries are below the new threshold, then the employers do not need to find out if they pass the "duties test" to be overtime eligible. Lastly, the Final Rule is intended to increase employment as some employers may find it more productive and economical to hire additional workers for the work to be done during overtime hours.

Given that the effective date of this new legislation is not until December 1, 2016, employers should have ample time to analyze their current employee population and make informed decisions as to whether they will increase employees' salaries to maintain their white collar exempt status or maintain the employees' current salaries and change their classification to non-exempt and begin paying the employee overtime when warranted. Employers should also review the various states they have employees in to determine whether federal or state laws apply.

For more information, please contact:

Mie Igarashi | +1 404 222 3212 |

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.

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