Does your practice employ salaried staff earning less than $47,476.00 per year?  If so, new federal Department of Labor rules will require you to pay overtime to those employees for any hours worked over 40 per week.  The new rules take effect December 1, 2016.

Under the federal Fair Labor Standards Act (FLSA), an employee who works more than 40 hours in a given work week must be paid time and one-half of his or her hourly rate for any hours worked over 40 unless the employee is exempt from the overtime requirement.  An employee is exempt from the overtime requirement only if:

• The employee is paid a salary at or above a minimum threshold; AND
• The employee also meets one of several tests for overtime exemption (i.e., the employee meets the requirements of one of the Executive, Administrative, Professional, Outside Sales or Computer Employee exemptions under the FLSA)

On May 18, 2016, the DOL published its final rule, which raised the minimum threshold below which overtime must be paid from $23,660.00 ($455.00 per week) to $47,476.00 ($913.00 per week).  What this rule change means is, even if your employee meets one of the overtime exemption tests, he or she will nevertheless be entitled to receive overtime pay if his or her annual salary is less than $47,476.00.  The minimum threshold will be revised automatically every three years, beginning with the first revision on January 1, 2020.

For further information on the rule change and overtime information generally, see the links provided at https://www.dol.gov/whd/overtime_pay.htm.

Frequently Asked Questions

Doesn’t the fact that I pay an employee a salary automatically mean I am not required to pay overtime?

No.  Unfortunately, this is a common misconception.  As indicated, the FLSA requires payment of salary at or above a certain salary threshold as well as satisfaction of one of the exemption tests before overtime pay is not required.  So, if the salary you pay is below the threshold or the employee’s job duties do not establish an exemption, you must pay overtime even if you do pay the employee a salary.  In addition, although the subject is beyond the scope of this bulletin, understand that the exemption tests are complicated and may be further modified by state law. You should consider consulting an attorney well-versed in employment compensation when preparing or revising your practice’s compensation plans.

I pay an annual salary but also a year-end bonus. Does that count toward meeting the threshold?

Not if the bonus is discretionary (that is, you can choose not to award any bonus).  However, under the new rule, non-discretionary bonuses (automatically given once a pre-determined objective is achieved), incentive payments and sales commissions may be considered in meeting the salary-level threshold, but only up to ten percent of the annual salary.  

How is overtime calculated for a non-exempt salaried employee?

Overtime must be paid at the rate of 1.5 times an employee’s regular hourly rate for any hours worked over 40 in a given work week.  A work week is any seven day period the employer designates. It could be Sunday through Saturday, Monday through Sunday, or Wednesday through Tuesday.  The important point is that the work week be set so there is a basis for calculating when overtime must be paid. 

To calculate an employee’s regularly hourly rate, first take the employee’s annual salary and divide it by 52 to get a weekly rate.  Then, take the weekly rate and divide it by the number of hours you require the employee to work in a given week.  If the employee normally works 40 hours per week, you divide the weekly salary rate by 40.  If the employee’s normal work week is 35 hours, you divide the weekly salary by 35.  

For example, if the employee’s annual salary is $45,000.00, the hourly rate would be calculated as follows:

$45,000.00 ÷ 52 = $865.38 (the weekly rate)

If the employee worked a 40-hour week, the regular hourly rate would be:

$865.38 ÷ 40 = $21.63 (hourly rate)

The overtime rate would then be:

1.5 x $21.63 = $32.45

If the employee worked 42 hours in a given work week, his or her pay would be:

Weeklyrate:	$ 865.38
Overtime (2 x $32.45):	$ 64.90
Total Pay:	$ 930.28

What are the penalties for failure to comply with the new rule?

If you fail to pay overtime, you may be sued in court for damages (the amount of unpaid overtime). In addition, under the FLSA, employees may be awarded “liquidated damages” in an amount equal to the amount of unpaid overtime, Such “double damages” are presumed awardable unless the employer proves it acted in good faith and had reasonable grounds for believing it was complying with the law (such as a legal opinion). Successful employees are also routinely awarded their attorneys’ fees.

This bulletin is not intended to provide, and should not be construed as providing, legal advice. As individual circumstances vary and state and local law may impose additional requirements, you may wish to consult with competent local legal counsel.