On May 18, 2016, the U.S. Department of Labor (DOL) published its long anticipated Final Rule to update the regulations defining and limiting the exemptions for “white collar” employees. The Final Rule, which was originally proposed in June 2015, broadens federal overtime pay regulations to cover 4.2 million workers not currently eligible for overtime by raising the minimum salary threshold to qualify for the Fair Labor Standards Act’s (FLSA) “white collar” exemption. The Final Rule becomes effective December 1, 2016.
While the FLSA provides most workers with guarantees of a minimum wage and overtime pay at a rate of not less than one and one-half times the employee’s regular rate for hours worked over 40 in a workweek, there are several exemptions. The DOL’s Final Rule updates and revises the regulations implementing the “white collar” exemptions from minimum wage and overtime pay for executive, administrative, professional, outside sales, and computer employees. To be considered exempt, employees must meet certain minimum tests related to their primary job duties and must generally be paid on a salary basis at not less than a specified minimum amount.
The current minimum amount required to meet the salary basis portion of “white collar” exemption, which was last updated in 2004, is $455 per week or $23,660 annually for a full-year worker. The Final Rule raises that salary level to $913 a week or $47,476 per year. This salary level reflects the regional variations in income as it is fixed at the 40th percentile of weekly earnings of full-time salaried workers in the country’s lowest income region, currently the South. This salary level will be automatically updated every three years to maintain a threshold equal to the 40th percentile. Based on current wage projections, the salary level is expected to increase to $51,000 on January 1, 2020.
In addition, the Final Rule permits employers for the first time to include non-discretionary bonuses, commissions, and incentive payments to satisfy 10 percent of the new minimum salary level.
The Final Rule also updates the requirement needed to exempt highly compensated employees (HCE) to the annualized value of the 90th percentile of earnings of full-time salaried workers, raising the minimum amount from $100,000 to $134,004 annually. Similarly, the HCE compensation level will be updated every three years, and will be maintained at the 90th percentile of yearly earnings of full-time salaried workers nationally.
Notably, and in response to employer comments and concerns, the Final Rule does not make any regulatory changes to the standard “duties tests.” The DOL states that given the increased salary thresholds and broadened coverage, employers will be applying the duties test to fewer workers.
The Final Rule follows a March 2014 memorandum from President Obama directing the Labor Secretary to “modernize and streamline” the regulations on exemptions from the FLSA’s minimum wage and overtime pay requirements. See our client briefing, President Obama Issues Memorandum Directing Labor Secretary to Revise Overtime Regulations.