On May 18, 2016, the U.S. Department of Labor (“DOL”) released the final rule updating the regulations defining and limiting “white collar” overtime exemptions under the Fair Labor Standards Act (“FLSA”). These rules apply to workers who fall under the executive, administrative, or professional exemptions from the FLSA’s minimum wage and overtime protections. The rule will go into effect on December 1, 2016, giving employers over six months to adjust.

The new rules set the minimum salary threshold for employee exemptions from overtime pay at $47,476 per year ($913 per week). This amounts to a 101% increase above the previous minimum. The “highly compensated employee” exemption has increased from $100,000 to $134,004 per year. These new thresholds will automatically update every three years, beginning on January 1, 2020.

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In a change to the salary basis test, nondiscretionary bonuses and incentive payments, including commissions, may satisfy up to 10 percent of the salary basis requirement. However, highly compensated employees must receive at least the full standard salary amount each pay period exclusive of any nondiscretionary bonuses or incentive payments, but these payments may count toward the total annual compensation requirement. Notably, the final rules do not change any job duty requirements that allow employees to qualify for exemption.

The DOL estimates that these new changes will result in approximately 4.2 million currently exempt employees becoming eligible for overtime pay with a projected cost to employers of up to $255 million per year.

In preparation for the rule’s implementation, employers should begin assessing their workforces and determining how best to comply. As a starting point, employers should evaluate their current employees, specifically identifying those employees currently in exempt positions whose salaries fall below the new salary threshold for exemption. Once the employees that will be affected by the new rules have been established, employers may consider the following options:

  • Increasing affected employees’ salaries to meet the new threshold;
  • Reclassifying affected employees as nonexempt and limiting their use of overtime; or
  • Reclassifying affected employees as nonexempt and redistributing work.

In addition to conducting this analysis, employers should vigilantly track all hours worked by their employees. Knowing exactly how many hours each employee works each week will allow an employer to make a more informed decision on how to prepare for the new rules.

More information, including specialized guidance for private employers, public employers, higher education employers, and nonprofit employers, visit the DOL’s website dedicated to the new rule.