The U.S. Department of Labor has issued the much-anticipated update to the FLSA overtime regulations. The new rules take effect on December 1, 2016. The final salary threshold rule is slightly lower than the Department’s proposal but still doubles the salary threshold for executive, administrative, and professional exemptions, raising the threshold from $23,660 to $47,476 a year, or from $455 to $913 a week. As expected, the existing duties test for the executive, administrative, and professional exemptions remains unchanged.
The new salary threshold is based on the 40th percentile of full-time salaried workers in the lowest income region in the country (currently, the South). To ensure the salary threshold is maintained at this 40th percentile, the new rule mandates an update to the salary threshold every three years. The threshold may rise to more than $51,000 with the first update on January 1, 2020.
The new rules also raise the salary threshold for the highly compensated employee exemption from $100,000 to $134,004.
In the face of this daunting new rule, there is one employer-friendly change -– the salary basis test was amended to allow employers, for the first time, to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold (although some nuanced restrictions apply to highly compensated employees). To credit nondiscretionary bonuses and incentive payments, the new rule requires the payments be paid on a quarterly or more frequent basis. However, where larger bonuses are paid, the amount attributable to the salary threshold is capped at 10 percent.
The Department of Labor estimates this new rule will affect 4.2 million workers nationwide. This includes more than 370,000 workers in Texas, 330,000 workers in Florida, 100,000 workers in Tennessee, 66,000 workers in South Carolina, 60,000 workers in both Louisiana and Alabama, and 39,000 workers in Mississippi. Employers now have approximately six (6) months to prepare and avoid misclassifications of these employees. We recommend employers conduct an internal audit with the assistance of qualified counsel of all the positions within your organization and identify all current employees classified as exempt with an annual salary below $47,476. Then, you should develop the proper strategy for (1) presenting a tailored message to all employees (whether affected or unaffected), (2) managing employees’ conversions to nonexempt status and/or continued exempt status, and (3) implementing comprehensive policies regarding nonexempt employees’ hours. These strategies are crucial to avoid potential litigation later.