2016 New Overtime Rule

By Edward J. Krill, Carr Maloney, P.C.
Photo: Malte Baumann
On May 18, 2016, the Department of Labor, Wage and Hour Division promulgated new standards for the salaried employee exemption from overtime pay. This new rule modifies existing Fair Labor Standards Act requirements and is slated to be effective December 1, 2016. Congress may block these new rules.


The basic change is to increase the minimum salary from $23,600 per year to $47,476 per year. This is the lowest amount payable to an employee who is otherwise “exempt” from overtime pay. The definition of a “salary” remains a periodic payment of an equal amount without reduction for days off, late arrival, or early departure.  Up to 10% of compensation may be in the form of non-discretionary incentives and commissions


The other criteria for exemption have not changed. An employee must still be performing administrative, executive, professional, or certain information systems management functions to qualify for an exemption. The additional exemption for “highly compensated” employees, has been increased to $134,004 per year with a “minimal exempt duties” requirement. HCE employees must be paid the full amount of that salary each pay period without regard to any incentive compensation.


Employers have several options in adjusting to this new rule: increase salaries to the minimum, strictly control the overtime hours of workers, or convert salaried employees to hourly pay and non-exempt status regarding eligibility for overtime. The timing of these changes may need to correspond exactly with the date the new rules go into effect. Implementation of these changes requires an evaluation of the employment relationship. Changing a binding employment contract prematurely or without employee consent may lead to a claim of breach of contract.


At Will Employment – Where the employee serves without a written contract on an indefinite basis and in the absence of employer commitments regarding compensation for a period of time or an Employee Handbook pledge regarding changes in pay, an employer is free to offer a salaried employee a new hourly pay status.


Offers of Employment and Appointment Letters –  When an employer has offered a position to a prospective employee at a salary below the new minimum and that offer stipulates a period of time of employment, such as the following school year or during the term of a specific project, and that offer has been accepted, and employer is not as free to change the compensation amount or basis. This situation requires a careful assessment of whether the parties formed a true contract of employment and whether a modified agreement can be required by the employer.


Employment Contracts – If a formal written contract of employment has been signed by the employer and the employee, respect for the terms of that agreement are required. A review of the conditions for amendment and termination and the period of time that the agreement is intended to exist should be done. This change in the law was probably not anticipated by the parties and it would be most unusual for an employment agreement to include a provision on future changes in law. If a material term of a compensation arrangement has become unlawful, the parties are no longer bound to adhere to it.  An arbitration clause requiring the parties to submit disputes to that process may be applicable.


Employee benefits can be affected by changes in compensation and hours of work. For example, a salaried employee who has been able to accomplish the work required in 30 hours per week, and wants to stay with that schedule, may lose eligibility for health, disability, life, or retirement benefits under the terms of those plans. Each benefit plan typically contains its own criteria for eligibility and the scope of benefits and may be available only to “full time” employees based on a certain number of hours per week.


Employee morale is an important consideration in this process. Clear, thoughtful statements that address employee questions are essential so that employees see changes in their employment situation as fair and considerate.


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