On Wednesday, May 18, 2016, the United States Department of Labor (DOL) issued the final version of its much anticipated overtime exemption rule that is estimated to require employers to pay overtime to 4 million more employees by raising the minimum salary level required to qualify for the “white collar” exemptions under the Fair Labor Standards Act (the FLSA) to $47,476 per year, more than double what it was under the previous regulations. The DOL on Wednesday also released a fact sheet and technical guidance document to assist employers with compliance with the new rule.

Existing Framework for Exemptions Remains Untouched

The new rule would accomplish these sweeping results by making just a small number of changes. The basic framework for the “white collar” exemptions remains unchanged. Under both the previous and new rule, employers need not pay overtime to executive, administrative, and professional employees for all work performed over forty hours in one week if the employees meet three tests: (1)the salary basis test, which provides that the employee must be paid a predetermined salary that is not subject to any reductions from week to week based upon the quality or quantity of work performed; (2) the salary level test, which sets forth the minimum specified amount of salary paid in order to qualify for an exemption; and (3) the duties test, which requires that the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.

The new rule leaves two of those three tests untouched (at least for now), including the existing duties test, and focuses only on the salary level test, more than doubling the amount of salary a worker must receive to remain exempt from the FLSA’s overtime provisions. The rule will take effect on December 1, 2016. 

New Rule More Than Doubles the Salary Level Threshold for Certain Exempt Employees

Under the previous regulations, last updated in 2004, a bona fideexecutive, administrative, or professional employee had to be paid at least $455 per week ($23,660 per year) to satisfy the “salary level test” to fall within those exemptions. A proposed version of the rule that was issued in June of last year had set the salary level at $921 per week, or $50,440 annually. The DOL lowered that figure by about $3,000 in the final version, requiring workers to earn a salary at or above the 40th percentile of weekly earnings for full-time salaried workers in the nation’s lowest income region (currently, the South region) and bringing the salary level to $913 per week or $47,476 annually in 2016 -- more than double the current threshold under the FLSA white collar exemptions.

New Rule Allows Employers to Include Non-Discretionary Bonuses and Incentive Payments to Satisfy Salary Level Threshold

For the first time, employers will be able to count non-discretionary bonuses and incentive payments (e.g., commissions) to satisfy up to 10 percent of the salary threshold.  Such payments may include non-discretionary bonuses and incentive payments tied to productivity and profitability. However, such payments must be paid on a quarterly or more frequent basis in order to be applied to satisfy up to 10 percent of the new salary threshold.  The new rule allows employers to make a “catch up” payment at the end of the quarter in the event an employee does not earn enough in nondiscretionary bonuses and incentive payments in a given quarter to retain their exempt status.  

New Rule Increases Salary Level for “Highly Compensated Employees”

The new rule also makes changes to the exemption for highly compensated employees (HCE). In its 2004 amendments, the DOL created this HCE exemption. Under that exemption, if an employee earns a salary of $100,000 or more and “customarily and regularly” performs one or more executive, administrative, or professional duties, he or she is exempt from the overtime provisions of the FLSA. The HCE exemption is an acknowledgement that a high salary is an extremely strong indicator of an employee’s exempt status, as a less thorough examination of the employee’s duties is required. The DOL’s new rule also bumps this salary level up, from $100,000 up to approximately $134,004 annually, equivalent to the 90th percentile of full-time salaried workers nationally.

New Rule Contains Automatic Updates to the Salary Level Threshold  

Finally, under the new rule, the salary threshold will be automatically updated every three years, beginning on January 1, 2020, to prevent the salary level from becoming out of date and ensure that it stays at the 40th percentile benchmark for weekly earnings for full-time salaried workers in the lowest income region (and at the 90th percentile for HCEs). The DOL will publish the updated rates in the Federal Register at least 150 days before their effective date.  

What Does This Rule Mean for My Business?

The new rule will require employers to revisit how they have categorized their employees as exempt or nonexempt. Of particular concern will be all those employees your business currently counts as exempt, but who earn less than the new salary threshold of $47,476 per year. A careful cost-benefit analysis will be required. For example, the employer may have to either (1) raise those employees’ salaries above the new threshold to maintain their exemption; or (2) forgo the raise, track the newly non-exempt employees’ work time, and pay those employees overtime for all hours worked over forty in one week.  As to those moved to non-exempt, employers may minimize overtime exposure by (1) reorganizing workload distributions, adjusting employee schedules, and/or spreading work hours; or (2) adjusting and reallocating wages between regular wages and projected overtime so that the annual compensation remains largely the same. Employers may, of course, avoid paying overtime to such employees by ensuring that no more than forty hours of work is performed each week, but this becomes increasingly challenging given the practice of many employees to work after hours using laptops, tablets, and cell phones. Employers must be diligent in tracking and compensating all hours worked for the soon-to-expand non-exempt workforce. 

The FLSA provides a two-year statute of limitations for claims for back overtime (three years for “willful violations”). “Willful violations” can result in payment of double damages as well. Employers should begin to plan now for the inevitability that many formerly-exempt salaried employees will become among those eligible for time-and-a-half for all hours worked over forty per week.