On May 18, 2016, the U.S. Department of Labor (DOL) announced the publication of a final rule amending the white collar overtime exemptions to the Fair Labor Standards Act (FLSA). The final rule, which will be published in the Federal Register on May 23, 2016, increases the threshold salary for the exemption to $913 per week ($47,476 per year), the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). The new rule also increases the total annual compensation requirement needed to exempt highly-compensated employees (HCEs) to $134,004 per year and established a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
The final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
The final rule makes no changes to the duties tests for both standard and HCE positions.
When does the final rule take effect?
The final rule will be published in the Federal Register and take effect December 1, 2016. Initial increases to the standard salary level (from $455 to $913 per week) and the HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective then. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
What is the intent of the final rule?
Proponents argue that the overtime regulations haven’t been meaningfully updated in decades. An exemption from overtime eligibility originally meant only to apply to highly-compensated white-collar employees has applied to certain employees earning $455 per week or $23,660 per year since 2004. In addition to the salary threshold, exempt employees must hold a position that passes the “duties tests” within specific exempt classifications defined in the regulations. According to the DOL, 62 percent of full-time salaried workers were eligible for overtime pay in 1975, but today only 8 percent of those same types of workers are overtime pay eligible due to the low salary threshold that has not kept up with inflation and wage growth.
This final rule updates the salary level required for exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-protected employees, thus making executive, administrative and professional exemption tests easier for employers and employees to understand and apply.
What are the white collar exemptions to the FLSA?
The FLSA’s white collar exemptions exclude certain executive, administrative, and professional employees from federal minimum wage and overtime requirements. Certain computer professionals and outside sales employees are also excluded from these requirements. The final rule addresses changes in the salary thresholds for the executive, administrative, and professional employee and HCE categories.
Currently, to qualify for exemption, a white collar employee generally must meet all of the following tests:
- Salary Basis Test: An employee must be salaried, meaning that he or she is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
- Salary Level Test: An employee must be paid at least a specific salary threshold, which is $913 per week (the equivalent of $47,476 annually for a full-year employee).
- Duties Test: The employee must primarily perform executive, administrative, or professional duties, as provided in the DOL’s regulations.
Certain professionals are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers). There is no salary level test required to qualify as an exempt outside sales employee. Finally, the current regulations also contain a relaxed duties test for HCEs who receive total annual compensation of $134,004 or more paid on a salary basis.
Keep in mind that job titles do not determine exempt status, and the fact that a white collar employee is paid on a salary basis does not alone provide sufficient grounds to exempt that employee from the FLSA’s minimum wage and overtime requirements. For an exemption to apply, an employee’s specific job duties and salary must meet all of the applicable requirements provided in the DOL’s regulations.
Where do I start when the new rule is implemented?
Although these changes do not go into effect until December 1st, start considering your options for compliance now. Options include raising pay to meet the new exemption thresholds, reducing workloads for individual employees who regularly work more than 40 hours per week and whose jobs will be reclassified as overtime eligible to reduce overtime payments, adjusting salary budgets to allow for additional overtime pay, and carefully planning your communications strategy for announcing the changes you will be making.
The DOL has prepared additional useful information to assist employers in understanding the impact of the final rule.
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