The Department of Labour (DOL) has released its highly anticipated final rule on overtime regulations under the Fair Labour Standards Act. At the unveiling ceremony, Vice President Joe Biden, Secretary of Labour Tom Perez and Senator Sherrod Brown highlighted the goals of the new overtime rule as set forth in the White House fact sheet, focusing on the extension of overtime protections to approximately 4.2 million more US workers. As the proposed rule had indicated, the final regulation more than doubles the minimum salary that an employee must earn to qualify for the so-called 'white-collar exemptions' under the Fair Labour Standards Act. By raising the weekly salary threshold, the number of employees who qualify for the overtime exemptions will be effectively narrowed, thereby requiring employers either to pay overtime to larger segments of their workforce (including employees previously considered exempt) or to raise salaries to the new minimum. This substantial increase in the salary threshold – from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) – will take effect on December 1 2016.

With an increase of just over 100%, the final salary threshold is slightly less than the initially proposed threshold of $970 per week ($50,440 per year) and is equal to the salary of the 40th percentile of full-time salaried workers in the lowest-income census region based in the southern states. The salary threshold will automatically update every three years instead of annually as originally proposed. Based on projected wage growth, the government predicts that the salary threshold will increase to $51,000 by January 1 2020, the date of the first scheduled update.

In response to employer concerns, the government has noted that the final rule does not alter the job duties tests under the executive, administrative or learned professional exemptions. While the DOL had indicated earlier that it was considering a quantification component similar to California's – which would have required employers to show that an employee was performing exempt duties a certain percentage of the time to qualify under the specific exemption – the final rule has left the duties tests unchanged. Further, for the first time ever, incentive and bonus payments can comprise up to 10% of the new salary threshold.

In addition to finalising the salary threshold for overtime exemptions, the final rule increases the total annual compensation requirement in order to exempt highly compensated employees from the overtime regulations. Such employees are exempt from the overtime pay requirement if they are paid a total compensation over the threshold (which must include at least $913 per week paid on a salary or fee basis), and if they 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 new threshold increases from $100,000 to $134,004, an amount equal to the annualised value of the 90th percentile of weekly earnings of full-time salaried workers in the lowest-income census region. As with the salary threshold, the highly compensated employee threshold will be maintained at the 90th percentile and will automatically update every three years.

Employers will have approximately 200 days to comply with the new regulation following its final publication – a substantial increase on the 60-day period that had been suggested. Employers should continue evaluating and assessing their pay practices and implementing the necessary changes in order to comply with the new regulation by December 2016. To help employers comply with the new rule, the DOL has released three technical guidance documents, specifically aimed at private employers,(1) non-profit organisations(2) and institutions of higher education.(3)

For further information on this topic please contact Brian J Gold at Sidley Austin LLP's Washington office by telephone (+1 312 853 7000) or email (bgold@sidley.com). Alternatively, contact Jennifer B Zargarof at Sidley Austin's Los Angeles office by telephone (+1 213 896 6000) or email (jzargarof@sidley.com). The Sidley Austin website can be accessed at www.sidley.com.

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