The US Department of Labor (DOL) has unveiled its much anticipated overtime rule impacting the so-called “white collar” exemptions under the Fair Labor Standards Act (FLSA) and its implementing regulations (29 CFR 541). As anticipated, the salary threshold for exempt employees is being doubled, but the current duties test is untouched. Effective December 1, 2016, the new salary threshold is set at $47,476 per year, or $913 per week. The salary change is based on the 40th percentile of full-time salaried workers in the South, the lowest-income region according to the latest national census, and it will be updated every three years beginning on January 1, 2020. In a rule that will impact employers of higher paid employees nationwide, an employee must be paid at least $134,004 per year to qualify for the highly compensated employee test.
The new rule represents several departures from the current regulations (last updated in 2004) and the DOL’s 2015 proposed rule:
- The DOL originally proposed a salary threshold of $50,440 in its 2015 proposed rule. Reducing the threshold to $47,476 in its final rule may reflect the DOL’s effort to appease the many concerns raised in the nearly 280,000 public comments lodged during the rulemaking process.
- The DOL adopted a six month implementation period, departing from the 60 day time period normally utilized when implementing a “major” rule (and also originally advocated for by the DOL).
- The salary threshold will be updated every three years, marking a significant departure from the DOL’s proposal to update the salary threshold annually, potentially tied to the CPI.
Other significant aspects of the final rule include:
- Leaving the duties test alone. Significantly, the final rule does not make any changes to the “duties” test used in determining whether white collar salaried workers earning the requisite salary are exempt from the overtime pay requirement. According to Secretary Perez in a press call on May 17, “[t]he business community overwhelmingly said do not touch the duties test, so we didn’t[.]” The DOL never overtly advocated for a change to the duties test, but did invite public comment on the issue during the rulemaking process.
- Allowing nondiscretionary bonuses, commissions and other incentive payments to count for up to 10 percent of the new salary level, provided such payments are made on at least a quarterly basis.
- Raising the highly compensated employee threshold from the current $100,000 to $134,004, an amount higher than the $122,148 threshold originally proposed and equal to the 90th percentile of full-time salaried workers nationally.
Despite the relatively straightforward application of the salary thresholds, this new rule requires, and provides an opportune time for, employers to evaluate their employees' duties and salaries and to make adjustments to exempt status and/or employees' duties and pay as necessary. This will take careful planning by employers. Employers should consider the following:
- Begin evaluating jobs impacted by the new regulations. If raising salaries above the threshold is not a viable option for employees falling under the new thresholds, employers will need to consider reclassifying exempt employees. In such cases, employers should carefully communicate to any reclassified employees that the reclassification resulted from changes to federal regulations and is not a reflection of work performance. Of course, as is true in any re-classification situation, an employer's communications should be tailored to its own particular and unique situation.
- These regulatory changes also provide a good opportunity for employers to take a broader look at their exemption classifications and to make any corrections to existing misclassifications.
- Nonexempt employees are required to track their hours worked. Employers should assess their current timekeeping practices and procedures, adjust them as necessary and make sure the policies are communicated to any soon-to-be nonexempt employees.
- Employees who are converted from exempt to nonexempt may still be paid a salary, but they must be paid for overtime worked as required. Employers should begin tracking the work time of employees who may be reclassified as, with careful planning, employers can assess the potential cost of reclassification and may be able to minimize the amount of overtime worked.
- Some states have overtime laws that differ from, and are more stringent and heavily enforced than, federal law. State law should be reviewed in conjunction with the necessary analysis of exempt status under federal law. Many states also require advance written notice of at least one day or pay period before changing pay, other than for a pay increase. So employers should announce changes in pay structure prospectively, and review state laws to ensure compliance with notice requirements.