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Show Me the Money: Updated DOL Regulation Increases Overtime Eligibility
By:  Tim Williams

An updated Department of Labor regulation will dramatically increase the number of employees that are eligible for overtime.  Currently, employees are eligible to receive overtime at a rate of 1.5 times the regular hourly rate for all hours worked each week over 40 hours.  However, there are various exceptions to this rule.  The most common is the “white collar” exemption, which exempts employees performing executive, administrative or professional duties.  Those employees were previously exempt from overtime if they made a threshold salary of $23,660 a year ($455 per week) and had certain job requirements.  This $23,660 yearly salary has remained unchanged for over a decade.  So, as long as the exempt employees made over the threshold amount, employers did not have to pay time and a half. 

Effective December 1, 2016, the $23,660 yearly salary figure will change to a $47,476.  So, employees making less than $47,476 ($913 per week) will qualify for overtime pay if they work more than 40 hours a week regardless of their job title.  Previously exempt managers not entitled to overtime will see a bump in their paychecks if they continue to work 40+ hours we week.  There were no changes to the duties test, so what employees fall under the “white collar” exemption remains the same.  Additionally, the highly compensated employee exemption will increase from $100,000 to $134,004.  According to the DOL, this will increase the number of employees eligible for overtime by 4.2 million.  The Economic Policy Institute estimates that 12.5 million salaried will now become eligible for overtime.  This will increase the percentage of full-time salaried employees that will be eligible for time and a half from 7% to 35%.  The regulations also establish a mechanism to automatically update the salary and compensation levels every three years beginning on January 1, 2020. 

Whether a significant portion of the newly eligible employees actually see time and half is currently being debated. Overtime eligibility may not translate into overtime hours.  As it stands, employers will be faced with three options for those employees that work over 40 hours per week:  (1) raise salaries to make employees exempt from overtime, (2) pay time and a half overtime, (3) cut hours to make sure that employees do not receive overtime, or (4) lower base hourly pay to offset overtime.  If employers chose the latter, the new overtime regulations may actually decrease paychecks for some employees.  Employers could scale back hours, adjust schedules and divide responsibilities among part time employees.  The net effect is employees may actually see a smaller check.  

On September 20, 2016, Texas, along with 20 other states, filed a lawsuit challenging the new rules.  The lawsuit contends that the DOL abused its authority by increasing the salary threshold so dramatically.  The lawsuit also challenges the automatic indexing mechanism that increases the salary level every three years.  The lawsuit alleges that the new overtime regulations would force states to pay overtime to state employees that are performing executive, administrative, or professional functions if that employee earns less than an amount determined by the federal government.  As lawsuit goes on to state that “the Federal Executive could deliberately exhaust State budgets simply through the enforcement of the overtime rule” and “by forcing many State and local governments to shift resources from other important priorities to increased payroll for certain employees, will effectively impose the Federal Executive’s policy wishes on State and local governments.”   

The new regulations are set to take effect in about two months.  The lawsuit could delay the process until a final resolution is reached.  For now, the new regulations and pending lawsuit have created uncertainty for employers and employees alike.  Ultimately, if the regulations can pass this recent legal challenge, it will take some time before we see the effect of the new regulations, i.e. whether it will force employers to scale back hours, increase in FLSA claims, etc.  At this juncture, employers and exempt employees should review current salaries and analyze the number of hours worked in case the regulations do take effect.  In light of the recent challenges, we should also turn our focus to the U.S. District Court for Eastern District of Texas.  Given the upcoming deadline, I anticipate we will want to keep apprised of the court’s rulings.   

Tim Williams is an attorney at Sprouse Shrader Smith PLLC and a director of the Texas Young Lawyers Association.  Tim can be contacted at tim.williams@sprouselaw.com.