In May, the Department of Labor issued its final rules regarding overtime minimum salary levels and other regulations under the Fair Labor Standards Act. The new Illinois overtime rules take effect December 1, 2016, and require employers to provide overtime to all “white collar” employees making less than $913.00 per week or an annual salary of $47,476. The new threshold is more than double the current minimum annualized salary of $23,660.
Generally, employers who are subject to the Fair Labor Standards Act must provide minimum wages and overtime regardless of salary unless the employee is deemed to be “white collar” or high income. The “white collar” provision under section 13(a)(1) provides an exemption for employees employed as a bona fide executive, administrative, outside sales or professional. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. The exceptions still apply, but now those employees must be paid at least $47,476 annually to qualify for the “white collar” exemption.
The Department uses three tests to determine whether an employee is “white collar” and therefore, exempt from overtime: 1) the Salary Level Test; 2) the Salary Basis Test; and 3) the Duties Test. The Salary Level Test requires that the employee be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed. Effective December 1, 2016, this amount will be $47,476 annually. The Salary Basis Test provides that salary must make up a specified minimum amount of the employee’s compensation level. In other words, a certain percentage of the employee’s compensation must come directly from salary and not from bonuses or other incentives. The Duties Test requires that the primary duties of an employee must be exempt (executive, administrative, outside sales or professional) for the employee to qualify as exempt.
(Note that the Salary Level Test and Salary Basis Test do not apply to doctors, lawyers, teachers or those in outside sales.)
One reprieve for employers under the new rule is that they will be able to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to ten percent (10%) of the standard salary level and not violate the salary basis test. For example, employers may use non-discretionary incentive bonuses tied to productivity and profitability. For employers to credit non-discretionary bonuses and incentive payments toward a portion of the standard salary level test, the Final Rule requires those payments to be paid on a quarterly or more frequent basis. Employers are also allowed to make a “catch-up” payment.
The Department recognizes that some businesses pay significantly larger bonuses; where larger bonuses are paid, however, the amount attributable toward the standard salary level is capped at ten percent (10%) of the required salary amount.
In addition to the new salary thresholds, the following noteworthy rules changes will take effect:
- The total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test is $134,004; and
- Salary and compensation thresholds will update automatically every three years.
The Department of Labor predicts that the new rules will provide overtime pay protections to over four (4) million additional workers within the first year of implementation. These new salary levels will not only have an effect on the working population, affording overtime for employees who were not previously entitled to overtime, it will have an effect on businesses.
For employees who will go from exempt to non-exempt because of this rule change, employers will have to pay current salaries and also pay overtime after eight (8) hours a day or forty (40) hours per work week. Employers may respond by raising salaries to maintain the exemption for certain employees. Employers also might reorganize workloads or adjust schedules to avoid the new overtime requirements.
Penalties for a violation of the Fair Labor Standards Act can be severe. At a minimum, employers must adjust or face the potential of costly repercussions. It is highly recommended that employers seek legal counsel as soon as possible before the rule change takes effect in December of this year. With adequate planning, your business can avoid some of the harsher consequences resulting from the rule and formulate a successful business plan for the future.