Nicole Rice

New federal overtime law begins December 1

By Nicole Rice, Policy Director, Government Relations

Capitol Update, Nov. 4, 2016

On December 1, 2016, the new federal overtime rules will take effect and change how employers currently classify and compensate both their nonexempt and exempt employees. Manufacturers will want to make certain they have compliance strategies in place before the new requirement is implemented next month.

What the New Law Says

In May 2016, the U.S. Department of Labor (USDOL) released its final rule revising the overtime exemption regulations of the Fair Labor Standards Act. The new rule

  • More than doubles the current annual salary level that must be met before an employee can be exempt from overtime – from $23,660 to $47,476 a year.
  • Requires that the salary threshold be automatically increased every three years with the first increase beginning January 2020.
  • Amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the new salary threshold. California does not have any such provision.
  • Sets the total annual compensation requirement for highly compensated employees (HCE) at $134,004 — up from $100,000; HCEs are exempt almost solely on their salary and are subject to a minimal duties test. There is no exemption under California law.
  • Makes no changes to the duties test provision.

What Does it Mean for California?

Approximately 400,000 California employees will be effected by this change. Further complicating matters is that California has its own minimum overtime calculation (40 hours x two times the state minimum wage) that is also scheduled to change as the state’s minimum wage increases. For example, when our minimum wage amount increases to $10.50 on January 1, 2017, California will still be under the new federal requirement with an annual wage amount of $43,680. However, by January 2019, we will have surpassed it coming in at $49,920.

Manufacturers will have to watch these increases carefully and account for these state-specific requirements and changes when making compliance decisions related to the federal overtime rule. Compliance strategies could include (1) increasing the salary of your exempt employees to meet both federal and state requirements; (2) reclassifying your exempt employees to a nonexempt status; or (3) some combination of the two to meet the separate requirements under both the federal and state law. All these options present significant challenges that could make it more complicated to maintain compliance.

Twenty-one states and a host of business organizations have filed two separate lawsuits in federal court alleging the USDOL exceeded its authority in enacting this regulation. However, the timing and fate of these legal challenges is uncertain. Therefore, California manufacturers should continue to prepare for compliance with the overtime rule.

More information, including fact sheets, questions and answers, and small business information can be found on the USDOL final overtime rule website.

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