On May 18, 2016, the U.S. Department of Labor ("DOL") issued its final rule updating and revising the overtime exemptions for executive, administrative, and professional employees under the Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 201, et seq. (the "Final Rule"). Effective December 1, 2016, the Final Rule more than doubles—from $23,660 to $47,476 on an annual basis—the minimum salary to satisfy these exemptions. As a result, employers must immediately examine their currently exempt workforce and, with potential business impacts in mind, make careful determinations about those who fall below the increased salary threshold. Employers must consider, for example, whether to raise their salaries to meet the threshold or reclassify them to non-exempt. If reclassified, employers must decide whether to reduce their hours worked to avoid paying overtime, whether to reallocate hours worked among existing employees, and how reclassified employees should record their time worked, among a host of other considerations.

The Final Rule has another significant feature: automatic increases to the threshold salary level every three years. This is the first time in its 78 years of enforcing the FLSA that the DOL has asserted that it has the authority to mandate automatic salary level increases. But there is significant doubt as to whether this component of the Final Rule complies with Section 13 of the FLSA.

Executive, Administrative, and Professional Exemptions Under the Final Rule

The FLSA generally requires employers to pay employees at least the minimum wage, and overtime if employees work more than 40 hours in a week. 29 U.S.C. §§ 206-07. The statute, however, exempts certain employees—such as those employed in administrative, executive, or professional positions—from these protections. See 29 U.S.C. § 213(a)(1); 29 C.F.R. § 541.

To qualify for the executive, administrative, or professional exemption, an employee must satisfy three criteria:

  1. The employee must be paid on a salary basis not subject to reduction based on quality or quantity of work ("Salary Basis Test");
  2. The employee's salary must meet a minimum level ("Salary Level Test"); and
  3. The employee's primary job duties must involve the kind of work associated with executive, administrative, or professional employees ("Duties Tests").

The Final Rule generally maintains these three criteria but sets the Salary Level Test at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, which is $913 per week or $47,476 annually. Thus, the Final Rule more than doubles the Salary Level Test from its current level of $455 weekly.

Additionally, the Final Rule increases the minimum salary to qualify for the "highly compensated" employee exemption from $100,000 annually to the 90th percentile of full-time salaried workers nationally, which is currently $134,004. To qualify for this exemption, in addition to satisfying the salary requirement, an employee must regularly perform at least one of the primary duties of a professional, administrative, or executive employee, and not perform manual labor.

The Final Rule also sets automatic increases in the threshold salary levels on January 1 every three years, beginning January 1, 2020.

In enacting the Final Rule, the DOL noted its efforts to minimize burdens on employers. For example, the DOL did not change any of the Duties Tests, thus leaving in effect the now-familiar duties requirements of the professional, administrative, and executive exemptions. In addition, the Final Rule permits employers to count nondiscretionary bonuses and commissions earned by employees as up to 10 percent of the employee's annual salary, if payments are made at least quarterly. The following chart summarizes exemption requirements under the Final Rule:

(Click here to view table)

To ensure compliance with the Final Rule by December 1, 2016, employers should consider promptly taking the following steps:

Identify positions currently classified as exempt that may become non-exempt when the new rules take effect. Currently, employees who earn a salary of at least $455 per week, or $23,660, are exempt as long as they also perform job duties that satisfy one of the Standard Duties Tests. Under the new DOL regulations, currently exempt employees will no longer be exempt from the FLSA's requirements unless they earn a salary of at least $913 per week, or $47,476 per year. Therefore, employers should identify exempt-classified employees who currently earn between $23,660 and $47,476 annually.

Consider how business operations will be affected by employee reclassification or salary adjustments, and design a plan best suited to meet the needs of the business. The DOL's new regulations do not require employers to reclassify currently exempt employees. Rather, employers have options for ensuring they comply with the new rules. For example, employers may provide pay raises to bring employees' salaries up to the new salary-level threshold, reduce or eliminate overtime hours for individuals who do not meet the new Salary Level Test, pay overtime to salaried employees who no longer qualify for an exemption, or some combination of these options. The determination on how best to proceed will require company attorneys to work hand in hand with management and human resources to assess potential business impacts. Attorneys should take steps during the process to maintain confidentiality and attorney-client privilege protections.

Consider impacts to employee relations, timekeeping and payroll systems, and the need for training to maintain compliance with the FLSA's recordkeeping provisions. If an employer chooses to reclassify some employees as non-exempt, it must also consider the employee relations implications. This includes the effect on morale of employees who consider themselves managers and professionals, but now must record their time worked. Employers also must consider the impact the new classification may have on payroll, timekeeping, and other internal recordkeeping operations. Newly non-exempt employees may be unfamiliar with tracking and reporting the hours they work and may need training to ensure all records are maintained accurately.

Consider how potential changes interact with other FLSA requirements. Employers must also be aware that any changes to its business model or employee classification may implicate other provisions of the FLSA. For example, employers should instruct reclassified employees to record all time worked, and implement policies prohibiting off-the-clock work if necessary. Likewise, if employers decide to reclassify employees to non-exempt and overtime eligible, employers should consider whether additional payments, such as holiday and inventory bonuses, must be included in the regular rate of pay for the purposes of calculating overtime.