New Federal Overtime Rules Require Action by Employers in 2016

In response to a directive from President Obama to update the regulations that define the overtime exemption criteria for white-collar workers, the Department of Labor has announced new rules that will affect millions of employees nationwide. The new regulations become effective on December 1, 2016.

The new federal regulations make four important changes in the rules regarding overtime exemptions. The new rules:

  • Increase the minimum salary that must be paid to exempt white-collar employees under the Federal Labor Standards Act to $913 per week, or $47,476 annually;
  • Allow employers to count non-discretionary bonus compensation and certain other incentive pay for up to 10% of the minimum salary;
  • Increase the minimum total compensation that must be paid to employees who qualify as exempt pursuant to the so-called “highly compensated employee” exemption to $134,004 per year; and
  • Provide for automatic adjustments in the salary and total compensation levels for these two exemptions every three years, starting in 2020.

Employers in California should remember that state overtime rules still apply, and employees must satisfy the requirements of both state and federal law to be treated as exempt. For many years, California’s exemption criteria have been more stringent than the federal criteria, which has permitted California employers to largely ignore the federal rules. As a result of the change in the federal rules, however, employers can no longer be confident that employees will qualify as exempt merely because they satisfy California’s rules.

In light of the changes, employers should identify their exempt employees who earn between $41,660 per year (the current California minimum salary for white-collar employees) and $47,476 (the new federal minimum salary); these employees will no longer qualify as exempt as of December 1, 2016. In order to avoid exposing themselves to claims for misclassification and unpaid overtime, employers should either re-classify such employees as non-exempt or increase their salaries to at least $47,476 per year as of that date. The change in the law may also provide employers with a convenient excuse to re-classify other employees whose current classification may be improper for other reasons.

Exempt classification issues are among the most troublesome decisions commonly faced by employers, and the new federal rules force employers to confront the classification decision with respect to exempt California employees earning salaries between $41,660 and $47,476.