Receiving over 270,000 comments must have impressed the U.S. Department of Labor (DOL) to the point that it scaled back the provisions originally stated or hinted at in the proposed rules, with final rules issued May 18 that go into effect on December 1, 2016 (notably after the national elections). The new minimum salary level to be exempt will go from $23,660 per year ($455 per week), last set in 2004, to $47,476 annually ($913 per week). Rather than using a 40th percentile national average of all salaried employees, DOL compromised and used the lowest salaried region according to the U.S. Census, currently the South.
DOL will also allow up to 10 percent of the salary ($91.30 per week) to be earned and paid through nondiscretionary bonuses, incentive pay and commissions, which can be paid no less often than quarterly. If bonuses are included that means the base weekly salary could be as low as $821.70 per week, and can continue to be paid either weekly, biweekly, semi-monthly or monthly. If the amount of the bonus does not meet the full 10 percent of the required salary payment, then the employer has until the next pay period to “true up” the minimum salary payment.
DOL also increased the minimum salary required for qualification as a highly compensated employee from $100,000 per year to $134,004 per year (calculated as the 90th percentile of full-time salaried workers nationally). Under the highly compensated test, employees must receive at least the minimum weekly salary amount (now $913 per week), but employers may credit nondiscretionary bonuses, incentives and commissions toward the remainder of the $134,004. If total annual compensation does not meet the required amount by the last pay period of the 52- week year, employers may make a single “catch up” payment during the last pay period or within one month after the end of the year. Highly compensated employees have a less rigorous duties test and need only customarily and regularly perform any one or more of the exempt duties or responsibilities under the white- collar regulations to qualify for exempt status.
The minimum salary level will be updated every three years starting January 1, 2020. DOL will provide a notification of the new salary levels 150 days prior to their effective date. It is important to note that if an employer wants to exempt part-time employees, they must be paid the full required salary amount to qualify for exemption under the general salary basis test and under the highly compensated test – there is no pro-rated salary option.
Importantly, the Department discussed but did not attempt to make any changes to the duties test to be an exempt executive, administrative or professional employee (EAP). The primary duty of each salaried exempt employee must continue to be in compliance with the duties test set forth separately for each exemption in the regulations, official interpretations, and Wage and Hour Division opinion letters. Instead, the Department’s new mantra, stated a number of times and in slightly different ways, was that “the Department has long recognized that the salary level test is the best single test of exempt status for white-collar employees, with the salary test being an objective measure that helps distinguish white-collar employees who are “overtime-eligible” (a new DOL term of art) from those who may be bona fide exempt executive, administrative, or professional employees.” The DOL’s new position has actually been used for quite a while by some practitioners when reviewing the status of salaried designated-exempt employees. If employees were not making in the $45,000-$60,000 range on an annual basis there was a good chance that their duties were not of sufficient importance to the organization for them to truly qualify as exempt under the duties test, even though their salary may have been well above the level required since 2004. DOL also chose not to pontificate about any particular occupations, unlike in 2004, on whether the “duties” test could be met for exempt status.
Notably absent from the regulations is any attempt to create a retaliation or discrimination claim against an employer regardless of the method the employer chooses to comply with the new salary level test or convert an employee to overtime-eligible status. The commentary sets forth a number of options available to employers including:
- increasing the employee’s salary level
- holding hours of work to 40 or less per workweek
- hiring of part-time employees to share the work load
- conversion to hourly status with time and one-half overtime pay
- reducing hourly pay to take into account expected overtime hours (though the Department seems to believe that not many employers will try that approach)
- other pay plans which will involve some component of overtime pay
Effect on morale and productivity, especially if an employee’s overall pay is reduced, should always be taken into consideration along with each employer’s economic and organizational situation. Also be wary of salary compression issues with salaried employees who are being paid slightly more than the new minimum. When reviewing their pay plans, employers should carefully consider how best to utilize the 10 percent non-discretionary bonus toward satisfaction of the new salary requirement.
Other pay plans which might be considered would be the fluctuating workweek (FWW) salaried pay plan where a base salary covers base pay for all hours worked. The effective hourly rate goes down as the number of work hours go up. Therefore, the FWW pay plan involves reducing the halftime rate after 40 hours in a work week. However, due to severe limitations set forth in 2011 regulation changes, an employer should tread carefully before adopting such a plan, especially since normal sick-leave day limits cannot be set. Likewise there is the possible use of a fluctuating day-rate plan which involves paying a set amount pay per day regardless of the number of hours actually worked. The calculations under it are similar to that under an FWW pay plan, but without the same regulatory or sick leave limitations. Still, it is recognized that most employers who do not increase salary levels for an employee to remain exempt will likely simply convert to some hourly rate and pay time and one-half for overtime after 40 hours per workweek.
Keep in mind that computer-related occupations may qualify for exempt status either as professionals under Section 13(a)1 of the Fair Labor Standards Act, or under the statutorily enacted separate Section 13(a)17 of the Act, which uses an hourly rate of $27.63. DOL has no authority to change the Act itself; however, the hourly rate under the computer-related occupations is still more than what the new regulations will require for a professional exemption to potentially apply. DOL also kept in place the carve-outs from the salary requirement for certified or licensed teachers, doctors, and lawyers, meaning the new regulations will not directly impact those professions. There was also no change to the “Outside Sales” exemption which does not have a salary requirement.
DOL seems to think their new regulations will result in considerably less court litigation than we have seen since 2002. Only time will tell. Employers should already have started their review process of all salaried exempt employees to determine who will be changed in status and to what type of pay plan. You have some reprieve for now to do the project carefully.