Tax Alert: DOL’s Final Overtime Rule Brings Sweeping Changes

May 31, 2016

What You Need to Know

The U.S Department of Labor (DOL) released a final rule making dramatic changes to the determination of which executive, administrative and professional employees—commonly known as “white collar employees” – are entitled to overtime pay under the Fair Labor Standards Act (FLSA).

The rule will make it more difficult for employers to classify employees as exempt from overtime requirements. The DOL estimates that 4.1 million salaried workers will become eligible for overtime when they work more than 40 hours per week under the new rule.

In addition to increasing wage expenses, the new rule increases employers’ payroll tax liabilities and creates additional compliance expenses.

Current rules require employers to satisfy the following three tests in order to exempt employees from overtime pay:

  1. Salary basis test. The employee is salaried, meaning he or she is paid a predetermined and fixed salary that’s not subject to reduction because of variations in the quality or quantity of work performed.
  2. Salary level test. The employee is paid at least $455 per week or $23,660 annually.
  3. Duties test. The employee primarily performs executive, administrative or professional duties.

The current regulations also provide a relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $100,000 and at least $455 per week.

The revisions in the final rule primarily relate to the salary level test. The rule increases the salary threshold for exempt employees to $913 per week or $47,476 annually. The final rule also allows up to 10% of the salary threshold for non-HCE employees to be met by nondiscretionary bonuses, incentive pay and commissions as long as certain additional criteria are met.

Additionally, the rule updates the HCE threshold to $134,004. A relaxed duties test applies for HCEs. The final rule continues the requirement that HCEs receive at least the full standard salary amount without regard to the payment of nondiscretionary bonuses and incentive payments. Finally, the rule provides for an update to the salary thresholds every three years.

The effective date of the rule is December 1, 2016. There is proposed legislation that could impact these new requirements. The legislation is in its beginning stages and therefore it is unclear how Congress will proceed at this time.

We Can Help

If your business currently employs salaried workers who earn less than $47,476 annually and requires them to work in excess of 40 hours a week, we can help you understand the financial and tax impact of the new regulations on your business. We can also help you plan for the implementation to help you avoid surprises and continue to accomplish your strategic goals. If you have questions about how these new rules may affect you, contact your Elliott Davis Decosimo advisor for assistance or a member of our tax practice.