Attention employers! On May 18 the U.S. Department of Labor (the “DOL”) issued its much anticipated final rule concerning the classification of employees as exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (“FLSA”) pursuant to its executive, administrative and professional exemptions (the “white collar exemptions”) and the highly compensated employee exemption. The new rule goes into effect Dec. 1, 2016, leaving employers approximately 200 days to confront potentially difficult choices between reclassifying as nonexempt and raising the fixed compensation of employees who do not meet the revised salary basis requirements.

As a reminder, to qualify for the white collar exemptions, an employee must (1) be paid on a salaried basis, (2) be paid at least the fixed minimum weekly salary and (3) meet certain requirements with respect to his or her job duties to show that his or her “primary duty” is the performance of exempt work (the “duties test”). Employees classified as exempt under the highly compensated exemption must similarly meet a minimum total annual compensation threshold and customarily and regularly perform at least one of the duties or responsibilities enumerated in the duties test. Critically, the duties test remains unchanged by the final rule.

Important Changes 

The final rule sets forth four notable changes to the exemption requirements:

  1. The minimum weekly salary necessary to qualify for the FLSA’s white collar exemptions more than doubles, increasing from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The new threshold represents the 40th percentile of weekly earnings for full-time salaried employees in the nation’s lowest wage census region — currently the South. While this threshold is slightly less than the $970 ($50,444 annually) weekly minimum the DOL suggested in its proposed rule, the final rule is expected to render nonexempt and eligible for overtime pay approximately 4.2 million workers who currently are exempt, according to the Obama administration.
  2. The total annual compensation threshold required to qualify for the highly compensated employee exemption increases by 26 percent from $100,000 to $134,004, the 90th percentile of earnings of all full-time salaried workers nationally. 
  3. The weekly salary and total annual compensation thresholds will automatically be updated by the DOL every three years. The salary thresholds will be updated to ensure the minimum salary for exempt employees is maintained at the 40th percentile of full-time salaried employees in the nation’s lowest wage census region, and the highly compensated employee exemption applies only to workers earning at or above the 90th percentile of earnings of all full-time salaried workers nationally. The first increases, which the DOL will publish 150 days in advance, will become effective Jan. 1, 2020. The DOL currently anticipates that the 2020 update will raise the white collar salary threshold to $984 per week ($51,168 annually) and the highly compensated employee annual threshold to $147,524 per year.
  4. The salary basis test is modified to permit employers for the first time to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the weekly salary threshold for the white collar exemptions. This unexpected addition to the rule permits employers to take such additional fixed compensation into account as long as payments are administered on a quarterly or more frequent basis. The final rule also permits an employer to make a “catch-up” payment in the event that an employee does not receive enough in nondiscretionary bonuses and incentive payments to remain exempt. Note that discretionary bonuses may not be used to satisfy the salary basis requirements.

Tips for Employers 

The final rule goes into effect Dec.1, 2016, providing employers with approximately 200 days to ensure their compliance. Accordingly, employers should take the following actions:

  • Identify Affected Employees and Decide Whether or Not to Reclassify:Identify employees who are currently classified as exempt and are paid between the current and new minimum weekly salary and total annual compensation thresholds, and decide whether to adjust their salaries to meet the new thresholds (which will change every three years) or reclassify these employees as nonexempt. Consider the number of hours each employee works and whether reclassifying the employee as nonexempt will result in additional costs in excess of raising the employee’s salary. Be mindful not to lose sight of state and local wage laws to the extent they impose any additional requirements on employers.
  • Develop and Execute a Reclassification Strategy: Develop an action plan to ensure compliance with the new rule before Dec. 1, 2016. The plan should include communications to reclassified employees concerning timekeeping and meal and rest break requirements as well as a review of relevant policies. Consider trainings for managers and reclassified employees regarding these topics. Where appropriate, consider implementing or updating policies regarding timekeeping and the maximum number of hours worked per week without supervisor authorization. Distribute talking points to managers highlighting the reasons for the changes, emphasizing to reclassified employees that they remain valued members of the team.
  • Consider Strategies to Reduce Overtime Hours: Consider hiring additional employees and/or reducing the number of hours for current employees to decrease the need and opportunity for newly reclassified employees to work overtime hours.
  • Implement a Policy for Re-evaluating Employee Classifications Every Three Years: Because the weekly salary and total annual compensation thresholds will be updated every three years and employers will only receive a 150-day notice of the new minimums, it is important to track employees who may need to be reclassified to maintain compliance.

While the final rule imposes significant new burdens on employers, it also presents a substantial benefit. Employers may take the opportunity presented by the mandatory reclassification of certain employees based upon compensation to review the classification of other employees whose classification as exempt may not be clear. In this manner, employers may be better positioned to ensure wage and hour compliance in the future — a goal that is now even more important, as employees and plaintiffs’ lawyers may be expected to increase their focus on wage and hour issues once the new regulations become effective.