Today, the United States Department of Labor finalized revisions to its Fair Labor Standards Act (FLSA) regulations. The key takeaways for employers are:

  1. The minimum salary for “white collar” exemptions will increase from $23,660 to $47,476;
  2. This salary level will be adjusted every three years, beginning in 2020; and
  3. These changes take effect on December 1, 2016.

While we are still studying the Final Rule and the DOL’s commentary, this initial alert will explain the major changes and offer some initial thoughts on their impact on employers. In the coming weeks, we will provide additional guidance. We will also hold a live briefing on the changes on June 23, 2016.

Changes to the Salary Level Test

Under the Final Rule, the minimum salary levels for the FLSA’s executive, administrative, and professional employee exemptions (“white-collar exemptions”) have more than doubled, from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). Because of this, any previously exempt employees who make between $23,660 and $47,476 will either need to be reclassified as non-exempt, rendering them eligible for overtime pay for hours worked in excess of 40 per week, or be given a pay increase to satisfy the new minimum salary level.

Additionally, the prior regulations provided a streamlined duties test for certain “highly compensated” employees with a salary of at least $100,000 per year. The Final Rule has increased this threshold to $134,004 annually.

The Final Rule also provides for periodic increases to each of these minimum salary levels, to be implemented every three years with the first to take effect January 1, 2020. The standard salary level will be updated to maintain a threshold equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage U.S. Census region (currently the South). By contrast, the highly compensated employee minimum salary level will be updated to maintain a threshold equal to the 90th percentile of annual earnings of all full-time salaried workers nationally. Updated rates will be published at least 150 days before their effective date.

Changes to the Salary Basis Test

In addition to satisfying the duties component of an exemption, employees must also be paid on a “salary basis.” This means that the employee is given a guaranteed salary that is not subject to reduction based on the quantity or quality of the employee’s work. Now, for the first time, the Final Rule will modify the salary basis test to allow employers to credit non-discretionary bonuses and incentive payments (such as commissions) towards the minimum salary level. While this is a welcome benefit to employers, there are significant limitations. The added payments may only be used to satisfy up to ten percent of the minimum salary levels (up to $4,748), and in order for such payments to be credited, they must be paid on a quarterly or even more frequent basis. This has the potential, for example, to exempt those in management positions who supervise sales teams or retail outlets and receive non-discretionary bonuses or commissions that bring them to or over the $47,476 threshold.

Certain Key Provisions Remain Unchanged

Though the minimum salary levels have changed drastically, and the salary basis test has been tweaked, the Final Rule does not change the duties tests applicable to the three white collar exemptions. Additionally, the Final Rule leaves untouched several less common but still significant exemptions, such as those covering outside sales employees, hourly computer professionals, licensed legal or medical professionals, and retail employees paid on commission.

Anticipated Impact and Options for Employers

The DOL estimates that this rule change will result in more than 4,000,000 employees gaining overtime eligibility. Obviously, this likely means additional labor costs for employers. Still, there are options other than raising employees’ salaries or paying significant overtime premiums. Two options to control costs include limiting the need for overtime by redistributing work among multiple employees (or assigning more work to truly exempt workers), and adjusting wages downward to account for anticipated overtime. There are likely to be more creative solutions as well, depending on the nature of the employer’s business operations.

What should you do now? First, resolve to address this issue soon – December 1st will come quickly. Second, review your workforce to determine which exempt employees will lose their exemption due to the Final Rule (i.e., exempt employees making between $23,660 and $47,476). Third, attempt to quantify by any means available the hours worked by impacted employees. Taking these steps will put employers on track to comply and to implement policies to control increased costs.

Finally, please save the date and be on the lookout for an invitation to our in-depth seminar covering these updates, which we will be hosting at our St. Louis Office on June 23, 2016.