What Does the New D.O.L. Overtime Rule Mean?

On May 18, 2016 the United States Department of Labor (DOL) released the long-awaited final overtime rule under the federal Fair Labor Standards Act (FLSA).

The FLSA is a landmark law that was established in 1938 as part of President Franklin D. Roosevelt's New Deal. The law banned "oppressive child labor", established a federal hourly minimum wage (at the time, it was 25 cents), and set the maximum work week at 44. The statute also guaranteed overtime wages (time-and-a-half) for certain jobs.

Prior to the passage of the FLSA, the Supreme Court had been blocking attempts to abolish child labor and to set a minimum wage for women and children. The Court had even ruled the New Deal unconstitutional in Schechter Corp. v. United States (1935). Roosevelt became so frustrated with the Supreme Court that he proposed adding up to six extra judges to the nine-justice court, one for each judge who did not retire at age 70. Finally, the court relented, upholding Washington State’s minimum wage law in West Coast Hotel Company v. Parrish (1937). This series of events has been referred to as the “stitch in time that saved nine,” because it preserved the Supreme Court as having nine justices.

Whether an employee is "exempt" or "nonexempt" is one of the most important issues under the FLSA. There are explicit rules about classifying employees as exempt or nonexempt. A tiny fraction of employers are exempt from the FLSA by statute; however, the vast majority of employers are subject to the FLSA. Those employers must understand how to classify their employees or face penalties.

Nonexempt employees are entitled to overtime pay, while exempt employees are not. An employer may not simply assign exempt or nonexempt status to its employees in whatever way it prefers; it must make that determination by following the FLSA. Misclassified nonexempt employees can sue for back wages and damages if they are not paid the overtime they are untitled to.

Misclassifying an employee as exempt or nonexempt is one of the most common errors committed by employers. Undoubtedly, these new rules will increase these misclassification errors, which already cost employers millions of dollars per year. Below is a brief snapshot of the changes affecting employers:

• Salary level increase. The most prominent change is the increase in the salary level required for exemption from overtime to an annual salary of $47,476. In other words, beginning December 1, 2016, if you make less than $47,476 per year you must be classified as nonexempt, and you must be paid overtime.
  

• Automatic updating every 3 years. The DOL will automatically update the standard salary and compensation levels every 3 years going forward. The DOL has set the salary level at the 40th percentile of full-time salaried workers in the lowest income region in the country, which is currently the South. The salary linked to the lowest income region applies to the entire United States, not just the South. The DOL states that based on projections of wage growth, the threshold should rise to over $51,000 by January 1, 2020, which will be the date of the first increase.

 
You can read the text of the FLSA here. You can read the text of the new rule itself here.