New Federal Overtime Pay Rules Are Imminent

New Federal Overtime Pay Rules Are Imminent

By Janet Koechel – Paradox Compensation Advisors

New Federal overtime pay regulations are imminent. Will your company pass the test?

It’s a New World for Overtime Pay

New rules for determining overtime eligibility could take effect in 2016 according to the Department of Labor (DOL) for employees whose base salary is less than $50,440 ($970 per week).  This new salary threshold of $50,440 is almost double the previous salary test of $23,660 which has been in effect since 2004.  This dramatic increase presents a challenge to businesses who may struggle with the potential increased costs of compliance and implementation.   The DOL has estimated that the new regulation will expand overtime eligibility for millions of mid- level supervisors and managers – especially those in the hospitality, restaurant and retail sectors.

While the goal of the new wage and hour rule is to give more workers overtime protection, it is unclear how many employees will really be affected.  Going forward, this salary test will be indexed to inflation however these changes are pending, they could be subject to more revisions or delays.

The Missing Piece of the Puzzle – The SECOND Test for Exemption from Overtime

For those responsible for wage and hour law compliance there is information missing from this new regulation as of now.    Because the current law requires a concurrent test based on job duties to be eligible for overtime, it is unclear whether the new regulations will truly impact “millions of workers” as the DOL has estimated.  Many labor law experts believe that the federal government (which is slow to implement anything) will soon announce how the second part of the test for exemption will be re-characterized. The second test includes a more complex but somewhat ambiguous and lengthy “duties” test which classifies “qualifying” exempt jobs into six categories

The two tests used to determine if a job is exempt or eligible for overtime pay: 

Test Current Proposed
1.       Salary Level Threshold $23,660 annually $50,440 annually
2.       Primary Duties 6 categories of jobs* Unknown
*Executive, Administrative, Professional, Creative, Computer, Outside Sales


This federal wage and hour law defines who is eligible for overtime pay and who is exempt from overtime, and if a company violates these rules, they can be reported to the DOL and an investigation will be launched.  Not only does a violation result in multiple years of back overtime for current and former employees in a given job classification  but the company may be required to pay significant financial penalties for violating these longstanding wage and hour rules .  In 2010 the DOL implemented an aggressive “plan, prevent and protect” campaign and stepped up investigations into wage and hour violations.  This increased enforcement has led to investigations of several major corporations. In 2014 LinkedIn was forced to pay over $6 million in back overtime for misclassifying insides sales people as “exempt” and not enforcing recordkeeping requirements.


It would be wise to do a thorough evaluation of all job classifications that include employees earning less than $60,000 currently classified as salaried and “exempt” from overtime.

  • Review job documentation and update
  • Calculate the costs of reclassification and impact on employees
  • Update your senior leadership team on the significant financial penalties if you are found to be in violation
  • Review and update your payroll recordkeeping system
  • Get experts in labor law to help build a road map for implementation


Many experts including the Society for Human Resources or SHRM have provided feedback to the DOL about potential “unintended consequences” resulting from this attempt to modernize overtime rules.    For example, in 2004 when the government last updated the job duties criteria for exemption, a number of companies reclassified employees as non-exempt experienced a backlash of resentment.  Employees who were salaried professionals felt demeaned by the reclassification as an “hourly” worker and resigned.  There was one case at a national retailer headquartered in Texas where the employee resigned and then went back and sued the former employer for misclassifying them all along and violating the law.

Here are some more issues to ponder:

  • Some companies have different vacation and benefits plans for hourly and salaried workers.
  • Companies may have different incentive plans with lower bonus opportunities for hourly workers
  • Companies may choose to lower hourly wages to offset the cost of overtime
  • Tracking work schedules for remote employees could be difficult
  • What if a job classification has one worker making $49,000 and another making 52,000? Will one be eligible for overtime and the other not?
  • Any employee earning an incentive or bonus that is classified as “hourly” must have overtime recalculated to include bonus as a component of their regular rate of pay.


Along with overtime eligibility, the current administration in Washington D.C. has also been advocating raising the federal minimum wage.  More changes could be on the horizon in the next year including revised definitions of primary duties under the six exempt categories.




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