This afternoon, the Wage and Hour Division of the U.S. Department of Labor released its long-awaited Final Rule regarding changes to the regulations governing who is an executive, administrative, professional, or highly-compensated employee under the Fair Labor Standards Act.

The Obama Administration has long argued that the salary threshold has not kept pace with the realities of the modern workplace, meaning that fewer workers qualify for overtime now than did in the past. According to Vice President Joe Biden, “The share of workers who automatically qualified for time-and-a-half pay has dropped to 7 percent today from 62 percent in 1975.” But under the Final Rule, according to the DOL, 4.2 million additional people will now qualify for overtime.

In addition to the Final Rule, the Department has also issued a Fact Sheet summarizing the regulation. The Final Rule will

  • Raise the salary threshold from $455/week to $913/week ($47,476 per year). This is the equivalent of the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South.
  • Permit non-discretionary bonuses and incentive payments (including commissions) to account for up to 10 percent of the new required salary level.
  • Raise the compensation level of the “highly compensated employee” to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004.
  • Automatically update the salary and compensation thresholds every three years to maintain the levels at the above percentiles.
  • Require NO change in the current Duties Tests.
  • Permit NO carve-out for colleges and universities, but these entities will be given options to avoid paying overtime under the current FLSA regulations. (See DOL release guidance aimed at higher education)
  • Institute a non-enforcement policy related to organizations that serve people with disabilities. (See DOL release guidance targeted at nonprofits)

The effective date of the new regulation is December 1, 2016. Earlier this year, DOL officials had called for an effective date 60 days after issuance.

New Salary Levels

Although the proposed rule, issued last June, had a threshold of $50,440, the final, slightly lower, salary level “reflected concerns from public comments,” according to Secretary of Labor Thomas Perez, quoted in Bloomberg BNA. Similarly, the proposed rule called for annual updates to the threshold amount, but the Final Rule calls for updates only every three years. Finally, the updates to the $47,476 figure will be based on a database of the lowest-wage Census Region, currently the South, while the updates to the $134,004 figure will be based on a national database of full-time salaried workers.

No Change to Duties Tests

Many commentators had predicted that the Department would propose changes to the so-called “duties tests” for the executive, administrative, and professional exemptions, including the adoption of a California-style requirement that 50 percent of an exempt employee’s time each week be devoted to performing exempt tasks. According to Secretary Perez, “The business community overwhelmingly said do not touch the duties test, so we didn’t.”

What Happens Next?

A coalition of major trade associations representing employers is lobbying for a bill introduced in March that would block the implementation of the Final Rule. A motion of disapproval under the Congressional Review Act and an appropriation policy rider have also been under consideration. The Executive Director of the U.S. Chamber of Commerce told Bloomberg BNA that regardless of the Final Rule’s softened language, he will still push for the legislation.

Constangy Brooks Smith & Prophete, LLP, will hold webinars on the new Final Rule and will issue follow-up bulletins as we continue to analyze the Rule. The key decision for Human Resources departments and management is whether to raise the salaries of currently exempt employees to $47,476, or to reclassify those employees to non-exempt status. If you are going to reclassify, you will need to determine the regular rate of pay for these employees in order to determine the proper overtime rate. This will require careful planning and consideration of a number of issues, not the least of which is how many hours of overtime are expected to be worked each week by the involved employee.