The U.S. Department of Labor (DOL) has announced a new “salary level” to the so-called white collar overtime exemptions under the Fair Labor Standards Act. In short, the new rules take effect December 1, 2016, and will more than double the salary level for those employees classified as exempt from overtime pay from the current level of $23,660 to the new level of $47,476, or $913 per week. The highly compensated executive salary level has been raised to $134,000. The new rule is expected to impact millions of employees and is expected to be especially hard on small businesses, nonprofits, many retailers, and employers in some regions of the country.

The DOL also announced that the salary level will be adjusted automatically every three years, based on the 40th percentile of the weekly earnings of full-time salaried workers in the lowest-wage Census region. Historically, the DOL has taken the position that future adjustments in salary level required new rule-making.

A brief background is warranted. All employees are entitled to overtime pay (pay at 1.5 times their “regular rate” of pay) for every hour actually worked over 40 in a given workweek, unless the employee qualifies for one of the many “exemptions” from overtime. The most popular overtime exemptions are the so-called “white collar exemptions” for persons employed as executives (management), or as professionals, or in a significant administrative capacity. There also is an exemption for highly compensated workers. To satisfy these exemptions, an employee’s job must meet two basic elements: (i) pay at a particular salary level and (ii) certain work duties consistent with the exemption in question. The new rules, while raising the salary level of these exemptions, did not affect the work duties component of the exemptions.

While there is much debate about the impact of this new salary level, this much is clear:

  1. Employers should:
    • Evaluate their operations to determine which employees, previously classified as exempt, will no longer be exempt given the new salary level as of December 1; and,
    • Determine whether to
      • Provide a raise in salary to these employees to attempt continued qualification as exempt; or,
      • Reclassify the employee as non-exempt and eligible for overtime and ensure the employee is recording hours worked by clocking in or other recording method.
  1. Labor costs will increase:
    • If salaries are increased, clearly that will result in increased labor costs, but there also will likely be “ripple” effects at all salary levels;
    • If employees are re-classified to non-exempt, those employees
      • Either will receive increased pay from working the same hours but with an overtime pay component to their wages; or,
      • Employers will try to reduce/control the hours of those employees, meaning more work hours to spread among other workers, who will have to be paid for those hours (perhaps to include overtime), or other employees will be hired for those hours.
  1. Employers may take comfort in some slightly less-bad news:
    • The effective date of December 1, which gives employers slightly more time to plan and adjust;
    • The salary level as is not as high as originally proposed back in June 2015, when the DOL proposed to raise the salary level to $50,440;
    • An employer can satisfy up to 10% of the salary level with payment of non-discretionary incentive payments, bonuses or commissions;
    • Certain jobs are not included, such as teachers, academic administrative professionals, physicians, lawyers, judges and outside sales workers.

Most employers recognized that the salary level needed to be raised. However, businesses were hopeful for a phase-in over time, rather than an immediate increase by more than 100%. In addition, many are concerned about unintended consequences. For example, more retailers and restaurants may move to more automation as a means of costs saving and as currently seen in some fast-food restaurants, and this could result in less job opportunities, especially among lower-skilled workers. Employees who are re-classified as non-exempt may perceive the act as a demotion, removing a more dignified status as “salaried exempt” or perhaps making those persons ineligible for certain benefits available only to salaried employees. Some commentators have expressed concern that the automatic increase in the salary level – even if only every three years – will become a self-perpetuating inflation trigger.

We do anticipate there will be litigation over the announced rules, attempting to halt or delay effectiveness. We also expect legislative initiatives to block or amend the new rules, but any such attempt is not likely to pass in the current administration.