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Business Alert: New Overtime Regulations

The Department of Labor recently issued sweeping new regulations on the eligibility of workers, especially “white-collar” employees, for overtime pay. Federal law requires that overtime be paid for nonexempt employees at a rate of one and one-half of regular pay for all hours worked over 40 hours in a week. To be “exempt” is to be ineligible for overtime. Employers should update their employee handbooks to reflect the new law on overtime pay.

Salary Tests

Since 1975, workers paid a salary of less than $155 per week ($8,060 per year) have been eligible for overtime, regardless of their job duties or how they are paid. Now that threshold has been raised considerably, to $455 per week ($23,660 per year). The “highly compensated employee” test will make workers with an annual salary of at least $100,000 exempt, if they perform office or nonmanual work and “customarily and regularly” perform one of the duties of either an exempt executive, administrative, or professional employee. The exempt duty need not be the employee’s “primary duty.”

Manual laborers, other blue-collar workers, licensed practical nurses, and “first responders,” such as police officers and firefighters, will be eligible for overtime regardless of salary.

Executive Exemption

In the middle ground of compensation, between $23,660 and $100,000 per year, individuals will be exempt as executives if their primary duty is management of the enterprise or one of its departments or subdivisions, and if they “customarily and regularly” direct the work of at least two full-time employees. A new requirement is that would-be executives must either have the power to hire and fire or at least their recommendations in such matters must be given “particular weight.” This tighter focus on hiring and firing is a change from the former regulations in which employees could fall within an executive exemption because of their general managerial authority. The term “particular weight” invites differing interpretations, but courts can be expected to look at factors such as whether hiring and firing recommendations are part of an employee’s regular job duties and how frequently such recommendations are made. An employee who owns at least 20% of a business and is actively engaged in managing it will also be exempt, without regard to salary thresholds.

Administrative Exemption

For employees in the same mid-range of compensation used for the executive exemption, but whose primary duty is “the performance of office or nonmanual work directly related to the management of the general business operations of the employer or [its] customers,” the administrative exemption will apply. The employee’s primary duty must also include work that involves the “exercise of discretion and independent judgment with respect to matters of significance.” These criteria are too broad to allow an exhaustive list of “administrative” positions, but some examples from the new regulations include insurance claims adjusters, financial service employees, policymaking human resource managers, and team leaders for major projects.

Professional Exemption

“Learned professionals” earning between $23,660 and $100,000 will continue to be exempt from overtime as long as their primary duty is the performance of work requiring advanced knowledge in a field of science or learning that is customarily acquired by a “prolonged course of specialized intellectual instruction.” The learned professional’s work must include work “requiring the consistent exercise of discretion and judgment,” as opposed to routine mental, manual, mechanical, or physical work.

Safe Harbor

Coming into compliance with the new regulations could be a daunting task, given their length, complexity, and lack of specific terminology. Ironclad advice that applies across the board is also in short supply because applying the new rules correctly is highly dependent on the facts and circumstances of each case. But balancing the difficulty of compliance is some leniency in enforcement. A “safe harbor” in the new regulations protects employers who make improper salary deductions. Employers with clear policies and procedures for addressing salary deduction errors will not lose an exemption for a class of employees unless the employer continues to make improper deductions after receiving complaints.

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