Today the U.S. Department of Labor (DOL) issued its much-anticipated final rule updating the regulations applicable to white collar exemptions. The changes set forth in the final rule go into effect December 1, 2016. The DOL estimates that, absent employer action, the change will entitle more than 4 million white collar workers currently classified as exempt to overtime eligibility.

While the Fair Labor Standards Act (FLSA) generally requires that most employees be paid at least minimum wage for all hours worked and overtime pay for all hours worked over 40 hours in a workweek, employees employed as bona fide executive, administrative and (most) professional (“white collar”) employees are exempt from both minimum wage and overtime pay if they meet two key requirements:

  1. They are paid more than a specified weekly salary on a fixed salary or “fee” basis; and
  2. They perform certain job duties.

Although the final rule does not make any changes to the standard duties tests, it significantly increases the salary level required for the white collar exemptions. (Outside sales employees are also within the “white collar” exemptions, but do not have a minimum salary requirement. Certain professionals are not subject to the salary requirements; and computer professionals may alternatively be paid based on a minimum hourly compensation requirement.)

Since 2004, the minimum weekly salary level required for the white collar exemptions has been $455 per week, or $23,660 annually. The new rule significantly increases the standard salary level required for the white collar exemptions to $913 per week, or $47,476 annually. While the new salary level is more than double the current salary level, the final rule permits employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. However, in order to consider nondiscretionary bonuses and incentive payments when determining the salary paid to an employee, the employer must pay these amounts on a quarterly or more frequent basis.

The final rule also permits employers to make a “catch-up” payment at the end of each quarter in the event the sum of an employee’s weekly salary plus nondiscretionary bonuses, incentives and commission payments does not equate to 13 times the weekly salary level. In particular, the employer may make one final payment sufficient to achieve the required salary level no later than the next pay period after the end of the quarter. Such a “catch-up” payment may only count toward the prior quarter’s salary amount, not toward the salary amount in the quarter it was paid.

Encompassed within the white collar exemptions are highly compensated employees who earn a higher total annual compensation level than the other categories of white collar employees and satisfy a minimal duties test. Currently, the minimum annual compensation threshold for highly compensated employees is $100,000. The final rule increases this threshold to $134,004. To take advantage of the highly compensated employee standards, an employee will have to be paid at least the standard weekly salary level of $913 per week on a salary or fee basis ($47,476 annually), while the remainder of the total annual compensation may include commissions, nondiscretionary bonuses and other nondiscretionary compensation. Although employers can use nondiscretionary bonuses and incentive payments to satisfy the annual compensation requirement for highly compensated employees, employers are not permitted to use these amounts to satisfy the $913 weekly salary.

The prior rules did not provide a mechanism for updating the salary and compensation levels applicable to the white collar exemptions. The new rule establishes a mechanism whereby the salary and compensation levels will be updated every three years, with the first update taking effect January 1, 2020. The DOL will publish a notice of the updated thresholds in the Federal Register and publish the updated rates on the Wage and Hour Division’s website.

Given the potential broad reach of the dramatically increased salary threshold, as well as the virtually automatic increase every three years, it is imperative that employers begin analyzing their salaried exempt workforce to prepare for compliance by December 1, 2016, if they have not done so already.

Click here to review the full text of the final rule.