The US Department of Labor has issued much-anticipated final regulations making changes to overtime exemption requirements under the federal Fair Labor Standards Act (FLSA). The new rules significantly increase the minimum salary and pay levels that employers must meet for employees to be exempt from the FLSA’s overtime requirements. The new regulations are effective on December 1, 2016.

The FLSA requires payment of overtime, at one and a half times an employee’s regular rate, for all time worked after 40 hours in a workweek. It exempts certain employees, mainly under the so-called “white collar” executive, administrative, and professional exemptions. Since 2004, the FLSA regulations have provided a highly compensated employee exemption. It covers highly paid employees who customarily and regularly perform one or more exempt executive, administrative, or professional duties. 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.

Since 2004, the FLSA regulations have required a minimum salary of $455 a week, or $23,660 a year. The previous adjustment in the minimum was in 1975, requiring a minimum weekly pay of only $155, $170, or $250, depending on the exemption and test used. The highly compensated employee exemption has required a $100,000 annual compensation level since its creation. Highly compensated exempt employees also must be paid on a salary or fee basis at a level at least satisfying the weekly salary minimum for the white-collar exemptions, as well as meeting the total annual compensation level.

Higher Minimums, With Automatic Future Increases

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. Last year, the DOL initially proposed a higher minimum salary level of $970 per week, or $50,440 a year, based on different methodology. The highly compensated employee exemption now will require annual compensation of at least $134,004.

DOL will adjust the minimum levels for these exemptions automatically every three years. The new rules peg the executive, administrative, and professional minimum salary levels at the standard salary level for the 40th percentile of the lowest-wage Census Region, which currently is the South. They tie the compensation minimum for the highly compensated employee exemption to the 90th percentile of full-time salaried employees nationally.  The first adjustment will be effective on January 1, 2020. The DOL must announce new rates at least 150 days in advance.

Another Change, and What DOL Didn’t Do

The white-collar exemptions have required employers to meet the minimum salary level strictly on salary paid – i.e., a fixed, predetermined amount paid regularly. The new regulations depart somewhat from that rule. Instead, they now will allow employers to meet at least 10 percent of the minimum salary level through payment of non-discretionary bonuses, incentives, and commissions. Employers must make such payments on at least a quarterly basis.

The new regulations also are significant for what they did not do: DOL did not make any changes to the exempt duties tests. Its initial proposal sought comments on possible changes to exempt duties requirements, particularly whether the FLSA should shift to California’s state requirement that exempt employees spend more than 50 percent of their time performing exempt work. The FLSA requires only that white-collar exempt employees have exempt work as their “primary” or main duties, which still may be less than a majority.

What Employers Should Do Now, and Points of Caution

With employees currently classified as overtime exempt, but whose salary or compensation levels are below the new minimum levels, employers will need to increase those rates to comply with the new regulations, if they wish to maintain overtime exempt status under the FLSA. In some cases, particularly given the large increase in the minimum salary level for the white collar exemptions, employers may need to analyze whether simply to convert an employee to non-exempt status and, if so, at what pay rate. Non-exempt employees may be paid on an hourly or salaried basis, but with overtime after 40 hours in a workweek (and after eight hours in a day in California). These decisions may be difficult, require careful study and strategic implementation. Changes in compensation require certain notices in some states. In addition, reclassification to non-exempt status may make employees subject to other requirements, such as timekeeping, meal and rest period requirements, and particular itemized wage statement mandates under state laws.

Employers need to bear state law salary requirements and minimums in mind. While some states follow the FLSA and its regulations, many do not or they have their own rules in some respects. The FLSA changes do not preempt more restrictive or protective provisions in state law. For example, while the FLSA now may allow employers to meet part of the minimum salary level through other types of compensation, state law requirements may not permit such a method and require that the minimum salary level required by state law be met entirely through salary. Many states, including California, do not recognize a highly compensated employee exemption at all. An employer always must comply with the more stringent provision between federal and state law.

Additionally, employers must comply with varying minimum salary requirements in federal and state law. For example, California requires that white-collar exempt employees be paid a monthly minimum salary of at least twice the state’s minimum wage. That level currently is $3,466.67 a month, or $41,600 a year. Under recently enacted legislation, California’s minimum wage will increase starting January 1, 2017, with annual increases until reaching $15.00 an hour for all employers by 2023. With a $15.00 an hour minimum wage, California’s minimum monthly salary will be $5,200, or $62,500 per year. For a while at least, however, California’s salary minimum will be lower than the federal requirement. Complying with the California minimum, but not the higher FLSA minimum, could result in an employee being exempt under California law (including its daily overtime requirements), but non-exempt under federal law and subject to the FLSA’s 40-hour weekly overtime rule.

Employers should consult with counsel in considering the necessary decisions, given the variables involved, required compliance steps, and many necessary considerations.

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