New Overtime Exemption Rules under the Fair Labor Standards Act
Under the Fair Labor Standards Act (FSLA), most Americans are entitled to overtime pay (at the rate of time-and-a-half their hourly rate) when they work more than 40 hours in one week. But certain professional, salaried positions are exempt from the overtime rules. Due to an executive order changing the salary requirements for the most common employee exemption to apply, however, it is estimated that over four million workers, currently classified as exempt, will become eligible for overtime pay by the end of this year.
The overtime exemption most applicable is the bona fide executive, administrative or professional employee exemption – also known as the “white collar” exemption. Currently, in addition to certain job-related requirements (i.e., “duties tests”) for an employee to fall within the overtime exemption, the employee must earn at least $23,660 per year. The executive order, however, more than doubles that amount, to $47,476 per year. The new rule does not change the “duties test” for the white collar employee exemption, but, given the new salary requirements, many of the employees currently under this exemption will become eligible based on the salary threshold alone. The good news is that employers may have a clearer sense of employee overtime eligibility, given that the employees’ salaries will now fall below the new threshold, such that an assessment of their duties will no longer be necessary.
The salary amount for the executive, administrative, or professional employee exemptions to apply in Maine is based on a formula: the annual compensation rate must exceed “3000 times the State’s minimum hourly wage or the annualized rate established by the United States Department of Labor under the federal Fair Labor Standards Act, whichever is higher.” 26 M.R.S.A. §663(K). Accordingly, the new federal regulations will impact the overtime exemption in Maine, making more Mainers eligible for overtime pay.
The salary level for highly compensated employee status (which is also an exemption from the overtime pay laws) will increase from $100,000 to $134,004 per year. The new rule also amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary levels. The initial salary increases will be effective on December 1, 2016, and automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
Unless an overtime exemption clearly applies, employers should either avoid having employees work more than 40 hours in one week, or compensate them at 1.5 times their hourly pay for all hours worked over 40 in a given week. The consequences for violating the overtime laws can be significant, because the law provides for damages including the employee’s legal fees and costs, as well as possible punitive damages. Misclassifying an employee as exempt can therefore be more costly than paying the overtime.