Armanino Blog

Impact of the Fair Labor Standard Act Overtime Rules

by Jenn McCabe
August 22, 2016

Ready For the New Overtime Rules? The new Fair Labor Standards Act overtime rules will have an impact on employers nationwide. Because of the federal rule changes, 4.2 million workers will become eligible for overtime pay, according to Department of Labor estimates.

The requirements take effect December 1st. To help you get your payroll in order by that deadline, here's a high-level look at the key changes and the steps you need to take.

What's changing?

Federal rules require employers to pay most employees at least the minimum wage, plus at least time-and-a-half for anything over 40 hours a week (states may have other rules). There are exemptions to this overtime requirement for certain white-collar employees. The new overtime rules increase the minimum salary a white-collar employee must make to be exempt―the first update to this salary threshold since 2004. Under the new rules:

  • The minimum salary threshold for standard exempt employees will increase from $455/week ($23,660 annually) to $913/week ($47,476 annually).
  • The minimum annual salary threshold for the highly compensated employee exemption will increase from $100,000 to $134,004.
  • The salary thresholds will update automatically every three years, to keep up with wage growth, beginning on January 1, 2020.
  • Up to 10% of the salary threshold amount can come from bonuses, incentive payments and commissions, as long as they're paid quarterly.

What this means

The changes mean that exempt white-collar employees who make more than the current salary threshold (standard or highly compensated), but less than the new threshold, will be reclassified as non-exempt and be eligible for overtime pay. Employers will either have to pay them overtime when they work over 40 hours a week, or raise their salaries above the relevant new threshold to keep them exempt.

Your state rules may be different

You also need to consider any state overtime rules, because they may be different. In California, for example, the salary threshold for standard exempt status is set at twice the state minimum wage, times 40 hours. That currently works out to $800/week ($41,600 annually), which is below the new federal threshold, but it will rise with the state's scheduled minimum wage increases. In 2019 California's minimum wage will hit $12/hour, making the state salary threshold $960/week ($49,920 annually), which will be higher than the federal threshold. California rules also do not allow employers to use bonuses, incentive payments and commissions for up to 10% of the salary amount.

These are just some of the differences. To learn more about your state regulations, talk to your attorney or HR professional.

What you need to do to

If you don't have a compliance plan, it's time to get started. Here's how.

Step 1, identify the employees who are affected and quantify the impact, by determining how many overtime hours each of them works. Remember to take state laws into account. In California, for example, non-exempt employees get time-and-a-half for anything beyond eight hours a day or on the seventh consecutive day of a work week, and double-time for anything over 12 hours a day or beyond eight hours on the seventh consecutive day of a work week.

Step 2, perform a cost-benefit analysis to determine whether it makes more sense to pay the employee overtime, to limit them to 40 hours a week and bring on part-time help as needed, or to raise their salary to keep them exempt.

Step 3, consult your HR partner to determine the rules' impact on other areas, such as internal pay equity. You'll also need to develop employee communications to explain the changes.

Step 4, implement the changes in your payroll processes.

To learn more about how Armanino can support your compliance efforts with cost-benefit analysis and payroll management services, contact the Outsourced Finance and Accounting team.

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Jenn McCabe - Partner, Outsource HR - El Segundo CA | Armanino
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