New Questions Arise as the Federal Minimum Salary Levels for Exempt Employees Will More Than Double on December 1, 2016
The U.S. Department of Labor (“DOL”) has issued new regulations which increase the minimum salary levels that employers must pay its salaried employees in order for them to be exempt from the Fair Labor Standards Act’s (“FLSA”) overtime requirements. These new rules go into effect December 1, 2016.
The FLSA requires payment of overtime for all hours worked over 40 in a workweek. It exempts certain employees from its overtime requirements, including employees falling under the executive, administrative and professional exemptions. Under these exemptions, an employee must be paid on a salary basis, the salary must meet a required minimum, and the employee must spend a sufficient amount of time performing exempt duties.
The Salary Level Increase
Since 2004, the FLSA regulations have required a minimum salary of $455 a week, or $23,660 a year to satisfy the exemptions. The new regulations more than double the minimum salary level for the executive, administrative and professional exemptions to $913 per week, or $47,476 a year. The new regulations will allow employers to meet at least 10% of the minimum salary through payment of non-discretionary bonuses, incentives, and commissions. The DOL will adjust the minimum salary level every three years with the first adjustment effective on January 1, 2020.
Employers should also note that the salary level to satisfy the highly compensated employee exemption is being increased from $90,000 to $134,000 per year.
At this time, the DOL has not modified the “duties test” requirements for employees to meet the executive, administrative and professional exemptions.
What Employers Should Do Now, Practical Tips
With employees who are currently classified as exempt, but whose salary levels are below the new minimum levels even after factoring in non-discretionary bonuses, incentives, and commissions, employers will either need to increase the salary levels to comply with the new minimum, or classify those employees as non-exempt, track their hours and start paying overtime.
Raising salaries to meet the new salary thresholds may impose not only direct costs, but also indirect costs by creating pressure to raise salaries for other employees higher up on the organizational chart.
If employees are converted to non-exempt status, employers will need to determine whether to pay them on an hourly or salary basis. Either method is permissible under the FLSA, but either way, the employee must be paid overtime after 40 hours in a workweek (and after eight hours per work day in California). Employers should avoid reducing salaries or hourly rates in order to compensate for expected future overtime earnings, since this could be deemed a “subterfuge” in order to avoid overtime, which would result in substantial penalties and back pay. Employees who no longer meet the $47,476 a year minimum must keep track of all hours worked, and they are entitled to meal and rest periods in jurisdictions which require them.
As a practical matter, employers should carefully assess who, among their salaried workforce, engage in truly exempt managerial, administrative, or professional duties which meet both the federal and any applicable state exemption requirements. Assuming the employee in question meets these “duties” guidelines, the employer should consider the employee’s anticipated workload and recalculate the employee’s compensation based upon anticipated overtime hours worked. If the employee’s current rate of pay, plus anticipated overtime, equals or exceeds the $47,476 a year minimum, the employee should be given a salary increase which allows the employee to meet the new annual minimum.
For employees who make less than the new minimum even when factoring in the amount of anticipated overtime, the employee should be reclassified as “non-exempt” and paid accordingly. If an employer wishes to transition the employee to a “salaried non-exempt” position as a morale measure, the employee must still keep track of all hours worked and will be eligible for any overtime, meal periods, and rest periods, consistent with state, federal, and local law.
Employers should consult with counsel in considering their options, given the variables involved.