On May 18, 2016, the Department of Labor finalized its highly anticipated overtime rule that updates the Fair Labor Standards Act’s “white collar” exemptions (including the executive, administrative, and professional exemptions) and the highly compensated employee exemption. Most notably, the Final Rule significantly increases the minimum salary an employee must earn to qualify for these exemptions. With an effective date of December 1, 2016, companies must understand the new Final Rule and take the appropriate steps to comply.
Key Provisions of the Final Rule
The DOL’s Final Rule contains several key changes to the current FLSA regulations:
- Increase to Minimum Salary for White Collar Exemptions: The new rule sets the minimum salary required to qualify for the white collar exemptions at $913 per week or $47,476 annually. This is more than double the current amount required to qualify for the exemption—which is $455 per week or $23,660 annually.
- Increase to Minimum Salary for Highly Compensated Employee Exemption: The Final Rule increases the total annual compensation needed to exempt highly compensated employees to $134,004 annually. This is a substantial increase over the current salary requirement of at least $100,000 annually. The new minimum salary is based on the annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally.
- Automatic Updates: The Final Rule establishes a mechanism for automatically updating the minimum salary and compensation levels for these exemptions going forward. The salary level will increase automatically every three years, starting January 1, 2020—the DOL estimates the salary basis for 2020 will be $984 per week, or $51,168 annually.
- Bonuses and Commissions Now Count: The Final Rule also allows for part of the minimum salary threshold to be met with bonuses and commissions. For the first time, employers can count non-discretionary bonuses, incentives, and commissions toward up to 10% of the required salary level. To credit such payments, however, employers must pay them on a quarterly or more frequent basis.
Actions for Employers
The Final Rule is designed to extend the FLSA’s overtime protections to millions of workers and will have a significant impact on employers’ operations. Because the Final Rule goes into effect soon, employers should quickly begin planning for the new requirements. Specifically, employers should consider the following actions:
- Identify the employee populations in the workforce currently classified as exempt under the white collar or highly compensated employee exemptions who will not meet the updated increased salary basis.
- Create an action plan to be ready to raise the salary for certain employees to meet the proposed minimum salary threshold, or reclassify employees from exempt to non-exempt.
- If employees are reclassified from exempt to non-exempt, determine an appropriate pay policy, work schedule, and timekeeping policy and practice for those employees, including an appropriate communication and training strategy.
- Budget for any salary increases and increased overtime costs.