Today, the Department of Labor (DOL) announced its long-awaited final rule updating the “white collar” overtime exemptions to the Fair Labor Standards Act (FLSA).
The final rule, which takes effect on December 1, 2016, increases the minimum salary for overtime exemptions to $47,476. This doubles the existing amount of $23,660, but is slightly lower than the amount proposed by the DOL last year. Further, the final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new minimum salary level, provided such forms of compensation are paid at least quarterly. Notably, the December 1, 2016 effective date is further out than previously stated by the DOL.
Another salary level slated to increase is for “highly compensated employees.” This amount will increase to $134,004 in total annual compensation. Above this salary amount, only a minimal showing is needed to demonstrate that an employee is not eligible for overtime.
The increase of the standard salary level to $47,476 equates to the 40th percentile of earnings for full-time American salaried workers in the South, which is the lowest-income Census region. The increase to $134,004 for highly compensated employees equates to the 90th percentile of full-time salaried workers nationally. Both of these minimum salary thresholds will be updated every three years based on these metrics. According to the DOL, this is to prevent the minimum salary thresholds from becoming outdated. Based on wage growth projections, the standard salary threshold is expected to rise to more than $51,000 with the first update on January 1, 2020.
The final rule makes no changes to the “duties test,” under which individuals employed in an executive, administrative, professional, outside sales, or computer employee role must meet certain minimum requirements related to their primary job duties. Thus, simply compensating an employee at or above the minimum salary does not automatically make them overtime exempt.
The final rule will likely touch nearly every sector of the U.S. economy, but is expected to have the greatest impact on nonprofit groups, retail companies, hotels, and restaurants, which have many management workers whose salaries are below the new threshold. The DOL has issued fact sheets specifically addressing concerns of employers in the non-profit and higher education sectors, as well as for state and local governments.
Employers should act now in order to be prepared for the December 1, 2016, compliance deadline. Employers have a range of options for responding to the updated standard salary level. For each affected employee newly entitled to overtime pay, employers may:
- increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
- pay an overtime premium of one and a half times the employee's regular rate of pay for any overtime hours worked;
- reduce or eliminate overtime hours;
- reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
- use some combination of these responses.