The Department of Labor ("DOL") finalized a new rule (“Final Rule”) on May 18, 2016, under the Fair Labor Standards Act ("FLSA"), which increases the threshold required to satisfy the DOL’s “white collar” exemption to the FLSA, effective December 1, 2016.

To fall under the white collar exemption to the FLSA, an employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations. The employee must be paid a predetermined, fixed salary not subject to reduction because of variations in the quality/quantity of work performed, and the salary must meet a specific minimum amount, as described below.

The Final Rule, composed of in excess of 500 pages, increases the salary threshold required to qualify for FLSA’s “white collar” exemption. Under the Final Rule, the salary threshold for executive, administrative, and professional exempt employees will be $47,476 a year or $913 a week starting December 1, 2016. Prior to that date, the salary cutoff was $23,660 per year or $455 per week. To determine these cut-off figures, the DOL used the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, which is currently the South.

Under the Final Rule, the salary threshold for highly compensated employees will initially be $134,004 a year (compared to the current number of $100,000 per year). To determine the cut-off figures, the DOL used the 90th percentile of earnings for full-time salaried employees. Highly compensated employees still have to meet the minimal duties test, which remains the same under the new rule. Therefore highly compensated employees will continue to need to customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption.

The rule was last updated in 2004, and the updated rule now establishes a mechanism for automatically updating the salary and compensation cut offs. The DOL will adjust the salary level every three years and will provide employers with 150 days’ notice prior to each three-year salary change. The next periodic salary adjustment will occur January 1, 2020.

The Final Rule also allows employers to count bonuses and commissions toward as much as 10 percent of the salary threshold. Specifically, under the Final Rule, incentive payments (such as commissions) and nondiscretionary bonuses may count for as much as 10 percent of the new salary level for executive, administrative, and professional exempt employees. In order for incentive payments and nondiscretionary bonuses to count toward these salary levels, employers must make the payments/bonuses at least quarterly with some ability to make a “catch up” payment. Therefore, employers may uses bonuses to make up the difference as long as they pay an employee at least $821.70 a week in their regular salary and the bonus makes up the difference to the threshold each quarter.

These changes under the Final Rule extend the right to overtime pay to approximately 4.2 million more employees. The effective date of the Final Rule is December 1, 2016, which gives affected employers some time to review the status of their employees and make any necessary adjustments under the Final Rule.

During this period, employers should evaluate their current employee classifications and whether any currently exempt employees will lose their exempt status under the Final Rule. If an employee currently qualifies as an exempt professional, administrative, or executive employee but makes between $455 and $913 week, that employee will lose his or her exempt status starting December 1, 2016. Once an employee loses exempt status, the employee must be paid overtime for all of the hours he or she works in excess of 40 hours a week. While certain occupations, such as teachers, lawyers, and doctors, do not have to meet this minimum salary cut-off under the FLSA, this updated salary threshold will likely have particularly significant impact on the retail, food service, and hospitality industries.

Additionally, employers should engage in a cost-benefit analysis: Should they (1) reclassify employees as nonexempt and eligible for overtime or (2) raise employees’ salaries to exceed the new salary threshold and maintain exempt status under the FLSA? Employers should examine how many hours their employees currently work, how many hours are actually required to do the work, and whether employees are being effectively managed and employed. Is it more cost- effective for an employer to hire more workers or pay its current workers overtime?

Because the Final Rule will likely result in some employees changing from exempt to non-exempt status under the FLSA, employers should also use this time to meet with any effected employees and allay any fears or concerns about their change in status. Employers should also update their procedures and conduct training as necessary for those employees who will need to track their hours and overtime starting December 1, 2016. Where applicable, employers should also review their travel and telecommuting policies and address how they are going to track remote time. While the effective date of December 1, 2016, is not yet here, employers should use this time to begin preparing for the changes that are coming.