The Final Rule - FLSA, US DOL and Overtime Rules: Part 1 - The Basics

Burr & Forman

Overtime Final Rule: Fair Labor Standards Act (FLSA) – Part 541:

In a nutshell:
Changes: Effective December 1, 2016, there will be changes dictated by the Final Rule:

1. to the minimum salary level requirement to qualify as an “exempt” employee from the FLSA and its overtime rules

2. to certain exempt employees; the Executive, Administrative, Professional, Computer professional, outside sales and highly compensated employees

3. about the types of compensation that can be included towards meeting the new salary threshold; non-discretionary bonuses and frequency of true up

4. establishing automatic updates to salary levels; three years.

Non – Changes

1. Salary Basis Test remains the same

2. Job Duties Test remains the same

3. And all provisions other than the those listed as changes

Brief history and existing rules:

Helping set the stage for the changes, history provides a good perspective on the subject matter. By reviewing the existing rules, we can better understand what exactly is “changing.” The FLSA came into being in 1938 and since then has undergone numerous amendments to its “pre - Final Rule” form. In 2014, President Obama directed the US Department of Labor (DOL) to update the regulations applicable to white collar workers protected under the FLSA’s minimum wage and overtime standards. After a public commentary period, the US DOL shaped and released the Final Rule on May 23, 2016 to become effective on December 1, 2016. The Final Rule is expected to extend overtime pay protection to over 4 million workers within the first year of implementation.

In 1938, following years of depression and economic hardship across the country, , President FDR enacted a sweeping new labor standards law called the Fair Labor Standards Act. The FLSA introduced minimum wage, labor safety regulations, and overtime regulations guaranteeing non-exempt workers time-and-a-half pay for hours worked over 40 per week. The overtime rules enacted were designed to address several of the main problems Roosevelt sought to address with his labor reforms - lack of jobs, and the exploitation of those who had jobs. Overtime pay regulations would serve to discourage companies from overworking their employees in order to avoid paying overtime wages, and as a result encourage additional hiring.

The FLSA generally requires employers to pay overtime in the amount of one-and-one-half times an employee’s “regular rate” of pay for each hour the employee works in excess of 40 hours per work week (section 7 of the FLSA, 29 USCS 207(a)). Under the FLSA, however, certain special exemptions are available to the overtime provisions and to the minimum wage provisions.

Exemptions related to the overtime provisions:

There are several exemptions by job type made available under the FLSA. The most commonly known FLSA overtime exemption provisions are provided for “white collar” workers. White collar workers include 1) executive, 2) administrative, 3) professional service, 4) outside sales, 5) computer professional and 6) highly compensated employees. The first three comprise the “EAP,” exemption, meaning the employee is not entitled to the standard payment of overtime wages at the rate of one and one-half.

To qualify for the EAP exemption, or for an employee to be considered exempt from the overtime pay provisions of the FLSA, the employee must satisfy all three of the following requirements (tests):

1. Salary basis test: employee must be paid on a salary or fee basis (an employee’s salary may not be reduced because of variations in the quality or quantity of the work performed)

2. Standard salary level test: employee must be paid at a certain minimum level of salary i.e. rate not less than $455 per week before December 1, 2016, and

3. Job duties test: employees must perform certain primary job duties as defined and explained under the applicable rules.

The first two of the above tests remain the same for each of the EAP classifications, with the exception that tests 1) and 2) do not apply to certain specific classes of employees under the “Professional Service” class, “Outside sales” employees and “certain computer related occupations” employees.

The excepted class of employees under the “Professional Service” group include: Doctors, Teachers, and Lawyers. Keep in mind, the specific job duty requirements differ for each of the EAP classifications and the test must be met based on the facts for each individual employee and not as a class of employees or job title. Prepayment plan An approved method of paying OT in advance and is used when work weeks vary. This plan can be adopted regardless of the length of the pay period. The payment must be made in advance. It is a form of loan in advance of the overtime hours to be worked. Time-o­ plan Under a time o? plan, the pay period must be longer than two weeks, the employee must be compensated under an hourly wage rate, and for each overtime hour worked within the pay period, the employee must be “laid o?” one and one-half hours another work week within the same pay period with no reduction in wages. The Wage and Hour Division has approved the use of the time-o? and prepayment plans in conjunction with each other. Such a combination can be used only when an employee is paid at intervals of 2 weeks or longer. Advantage: it takes care of situations where an employee works overtime and has built up insufficient or no credit under the plan to take care of such overtime. By giving an employee time off at one and one-half the overtime hours worked, the employer satisfies the requirements of the Act. This is different than comp time which can only be used by the public sector.

Changes under the FLSA Part 541 “Overtime” Final Rule:

The Final Rule changes the following:

1. Standard salary level test threshold: employee must be paid no less than $913 per week ($47,476.00 annually) beginning on December 1, 2016.

2. Measurement period to which the threshold is applied: standard salary level threshold has to be applied on a weekly basis, however, note that the “Prepayment Plan” and “Time-off Plan” provisions have not changed and are still available to employers to meet the requirements of the FLSA.

3. Non-standard types of pay can be included to meet the threshold: these include nondiscretionary bonuses and incentive payments (including commissions). These types of compensation must be promised in advance to employees based on a fixed formula.

4. Extent to which any non-standard types of pay can be counted towards meeting the threshold: non-standard types of pay, such as nondiscretionary bonuses may be used to satisfy up to 10% of the standard salary level which means minimum of 90% of standard salary level must be paid as a weekly salary.

5. Highly compensated employee (HCE) annual compensation level: annual compensation level of a HCE effective December 1, 2016 is no less than $134,004.00. This is up from the prior requirement of $100,000.00.

6. Length of period within which the threshold must be met using non-standard pay for “exempt” employees ONLY under the EAP, Outside sales, computer professionals, and HCE: payments must be made on a quarterly or more frequent basis. If an employee does not earn the minimum level of standard salary from the nondiscretionary bonus in a given quarter, an employer must make a “catch-up” payment within one pay period of the end of the quarter.

7. Every 3 years beginning January 1, 2020, the standard salary and annual compensation levels will be automatically updated based on a percentile formula.

The Final Rule did not make any changes to the “job duties” test.

The Final Rule did not make any change to the federal “minimum wage” requirements.

Hourly employees – minimum wage requirement has to be met by paying a minimum of $7.25 per hour, and for all hours worked in excess of 40, compensation should be paid at the rate of one and one-half the regular rate of pay.

Salaried employees – minimum wage of $7.25 has to be met.


While not overwhelming, the changes brought about by the Final Rule are very significant. These changes may be difficult to implement and have a huge impact on both exempt employees and an employer’s bottom line. Our clients are going to have numerous questions as they begin applying the new rules to their respective businesses and employee arrangements. We hope this overview provides the basics and resources to learn more.

For more information on the South Carolina Association of CPAs, click here. For the full CPA Report, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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