The Department of Labor has issued its final rule amending the overtime and exemption regulations of the Fair Labor Standards Act. Although the final rule differs in some ways from the July 2015 proposed rule, it will have significant administrative and budgetary impacts on most employers. The new rule becomes effective December 1, 2016, and will update automatically every three years thereafter.

The new DOL regulations make the following significant changes to the exemption thresholds:

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  • Raise the salary level test for most exemptions to apply from $455 per week ($23,600 annually) to $913 per week ($47,476 annually). This new salary level is based on the 40th percentile of earnings of full-time salaried worked in the lowest-wage Census Region, currently the South. The proposed regulations had indicated that the salary level would rise to $970 per week ($50,440 annually).
  • Permit employers to meet 10 percent of the new salary threshold through bonus and incentive compensation. To take advantage of this option, the bonus or incentive compensation must be nondiscretionary, and employers must pay the bonuses on a quarterly or more frequent basis. Employers may use a “catch-up” payment for employees who fail to earn a high enough bonus to meet the threshold.
  • Raise the total annual compensation requirement for highly compensated employees (HCEs) from $100,000 to $134,004. This annual compensation level is based on the 90th percentile of full-time salaried workers nationally. The proposed regulations indicated that the total annual compensation requirement for HCEs would rise to $122,148.
  • Establish a mechanism for automatically updating the salary and compensation levels every three years to maintain levels at the 40th and 90th percentiles and to ensure that they continue to provide useful and effective tests for exemption. The first automatic update will occur on January 1, 2010.

No changes to primary duties tests

The new regulations do not change the primary duties tests for any exemptions to apply. DOL had omitted any such changes from the July 2015 proposed regulations, but it had hinted that it might amend them when it asked for comments.

Guidance for employers

In addition to publishing the final rule, DOL issued several guidance documents intended to aid employers in understanding and complying with the new rule. DOL’s general guidance for private employers addresses the exemptions generally and provides strategies for complying with the new salary threshold.

Federal contractors may recoup additional labor costs

Federal contractors that submit a timely notice and supporting data quantifying any increased costs they will incur to comply with the new DOL final rule are entitled to an adjustment of their contract price, unit price labor rates, or fixed hourly labor rates. See FAR 52.222-43 and FAR 52.222-44.