Canadian businesses with operations in the United States should be aware of recent and significant changes to the overtime rules. Yesterday, the U.S. Department of Labor (DOL) published the long-awaited amendments to the “white collar” exemptions for executive, administrative, and professional employees, as well as the provision governing highly-compensated employees.  The Final Rule significantly increases the minimum salary an employee must earn to qualify for a white collar exemption and for the highly compensated employee exemption under federal law.  The increased minimum salary must be implemented by December 1, 2016, which gives employers approximately 200 days to prepare for and comply with the Final Rule.

Background

Over a year ago in March 2014, President Obama announced his intention to “modernize and streamline” the overtime regulations, which were last updated in 2004.  In July 2015, the DOL published the proposed rules, which sought to “update the salary level required for exemption to ensure that the FLSA intended overtime protections are fully implemented.”  The DOL received nearly 300,000 comments regarding the proposal.  After reviewing the comments, and following approval from the Office of Management and Budget, the DOL published the Final Rule on May 18, 2016.  The Final Rule is effective on December 1, 2016.  Although the Final Rule does not drastically differ from the proposed amendments, there are several notable differences.

Key Provisions of the Final Rule

The DOL’s Final Rule contains several key changes to the current FLSA regulations:

  • Sets the minimum salary required to qualify for the white collar exemptions (the administrative, executive, and professional exemptions) at the 40th percentile of weekly earnings for full-time salaried workers in the region in which the salary level is lowest (currently the South).  The Final Rule’s salary level increase more than doubles the current salary threshold—which is $455 per week or $23,660 annually.  This amounts to a minimum salary of $913 per week or $47,476 annually as of December 1st.  This is a slight change from the proposed amendments, which would have set the salary level based on salaried workers nationally, instead of those in the lowest-wage census region.  As a result, the salary levels in the Final Rule are lower than those originally proposed.
  • Increases the total annual compensation requirement needed to exempt highly compensated employees to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally.  Using data from the fourth quarter of 2015, the DOL set the new salary basis at $134,004 annually. This is a large increase over the current salary basis of at least $100,000 annually.
  • Establishes a mechanism for automatically updating the minimum salary and compensation levels for these exemptions going forward.  Under the Final Rule, 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.  Under the proposed amendments, the salary levels would have updated annually.  After considering comments regarding the burdens of updating annually, the DOL settled on updates every three years.  The DOL will publish the updated salary thresholds in the Federal Register before they go into effect.
  •  Allows part of the salary threshold to be met with bonuses and commissions.  For the first time, employers can count nondiscretionary 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.

The Final Rule is also notable for what it did not change.  In the proposed amendments, the DOL indicated that it would consider making changes to the exempt classifications’ duties requirements.  When the DOL issued the proposed amendments, it “[sought] to determine whether, in light of [the] salary level proposal, changes to the duties tests are also warranted” and “invite[d] comments on whether adjustments to the duties tests are necessary.”  Yet, the Final Rule did not change the current regulations for primary duty or revise the tests for the duties required of executive, administrative, or professional employees.

Actions for Employers

Because the Final Rule goes into effect December 1, 2016, employers should quickly begin planning for the new requirements.  Specifically, employers should consider the following actions:

  • Identify the employee populations in your workforce currently classified as exempt under the white collar exemptions who will not meet the increased salary basis (with the inclusion of nondiscretionary bonuses, incentives, and commissions).
  • 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 training strategy and budgeting for salary increases and increased overtime costs.
  • Have communication plans in place for workforce questions on whether they are properly classified, or entitled to a wage increase—including those who currently make more than the new salary levels—due to the publicity generated by the Final Rule.

We will continue to monitor developments in this area.