Effective December 1, 2016, the Department of Labor’s final rule on federal overtime regulations will increase the salary amount necessary for “white collar” workers to remain exempt under the Fair Labor Standards Act. Though numerous states and federal lawmakers currently challenge the authority of the Department of Labor to implement certain initiatives under the final rule, it is important for companies of all sizes to prepare for these regulations within the next month. We recommend that employers respond to the new regulations by taking steps to effectively implement new compensation initiatives for their workforces.

White Collar Exemption

According to the Department of Labor, within the next year the updated overtime regulations will affect more than four million employees who fall within the white collar exemption. To qualify for this exemption, an employee generally must satisfy the salary basis test, salary level test and the duties test. Under the salary basis test, the employee must be paid a predetermined and fixed salary that is not subject to reduction based on variations in the quality or quantity of work performed. The employee must also be paid at least the specified weekly salary to satisfy the salary level test. Finally, the employee must primarily perform executive, administrative, or professional duties, as those terms are defined and interpreted by the courts and the Department of Labor. In California, for employees to remain exempt, employers must still comply with the state’s “primary duty” standard, which is different and more burdensome than the federal standard.

Salary Basis Test

The final rule updates the salary basis test for the first time since 2004. It increases the weekly salary threshold for exempt employees from $455 ($23,660 annually) to $913 ($47,476 annually). For California employers, the federal standard now exceeds the California threshold of $41,600, requiring companies in California to comply with the more stringent federal regulations. The federal salary level is set according to a level equal to the 40th percentile of weekly earnings for full-time salaried employees in the country’s lowest earning region. Future automatic updates to the salary level will occur every three years, beginning on January 1, 2020, although this particular provision is currently the subject of legal challenges by 21 states and federal regulators who dispute the Department of Labor’s authority to increase the salary basis on a recurring basis.

Effective Implementation

The practical effect of the regulations is that many employers will be required to increase employee compensation to satisfy the exemption. Employers must increase the salary of an employee who meets the duties test to at least the new salary level for that employee to retain his or her exempt status. Notably, however, employers are now permitted to use nondiscretionary bonuses and incentive payments, such as commissions, to satisfy up to 10 percent of the standard salary level, so long as these payments are made on at least a quarterly basis.

Other alternative strategies are available. For example, employers may switch an employee to an hourly rate and pay the employee in accordance with applicable overtime laws. Under federal law, hourly employees must be paid an overtime premium of one and a half times the employee’s regular rate of pay for hours worked more than 40 in a workweek. If an employee is switched to hourly remuneration, the employer must pay that employee in accordance with applicable state laws. California employers should provide these non-exempt employees with meal and rest periods and overtime pay in accordance with state law. In this regard, we advise employers to use the new regulations as an opportunity to audit their current classification practices and correct any deficiencies as the Department of Labor implements the new regulations.

To prepare for these adjustments, we strongly recommend that employers audit the demographics of their workforce (the number of exempt and nonexempt employees) to identify which employees require a salary adjustment under the new regulations. Companies will then need to determine which employees will receive an increase in compensation to remain exempt and which employees will be paid on an hourly basis and be eligible for overtime in accordance with federal and state overtime laws. We also recommend updating your handbook and any classification policies to reflect the new regulations. A disciplined audit will help prevent unintended liability and may serve as an opportunity for employers to boost employee morale with increased compensation.

Questions

The final rule was published on May 18, 2016 and takes effect December 1, 2016. In light of these changes to existing law, those affected are encouraged to review their policies and practices. Please contact Gordon Rees Scully Mansukhani attorneys with any questions regarding the new overtime regulations.

For more information on the final rule, please click here.