The U.S. Department of Labor (“DOL”) has proposed significant changes to the overtime pay regulations of the Fair Labor Standards Act (“FLSA”). The proposal would increase the salary threshold for the standard white collar exemptions to the 40th percentile of weekly wages for all full-time salaried employees (more than $50,000 per year) and increase the salary threshold for highly compensated employees to the annualized value of the 90th percentile of weekly wages of all full-time salaried employees (more than $122,000 per year). As employers begin evaluating the impact of these proposed changes on their workforce, many are reexamining how they pay employees and whether their compensation plans should change with the new proposal.

Employees classified in the standard executive, administrative, or professional categories must receive a minimum salary (currently $455 per week) in order to be exempt from the minimum wage and overtime requirements of the FLSA. Their pay must be a fixed, predetermined amount “free and clear” for each workweek in which they perform any work. Bonuses, commissions, and other discretionary payments generally do not qualify, as these are subject to variations based on the quality or quantity of work performed. Employers must also exclude board, lodging, and payments for medical, disability, life insurance, or contributions to retirement plans from the calculation. Though the regulations set a salary floor for exempt employees, employers may still pay their exempt employees additional compensation above and beyond the minimum, such as commissions on sales or additional compensation for hours worked beyond the normal workweek, without forfeiting their exempt status.

The salary level test for highly compensated employees (“HCE”) is different. An HCE must receive at least the same base salary throughout the year as required for exempt employees under the standard exemption. However, an employer may include additional income paid to the HCE in the form of commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during a 52-week period to reach the salary threshold (currently $100,000 per year). If an HCE’s total annual compensation does not reach $100,000 by the final pay period of the year, the employer has one month following the last pay period to make a final catch-up payment to achieve the $100,000 compensation level. With the exception of an increased salary threshold, the DOL has not signaled an intent to revise the salary basis test for these employees.

Recognizing the growing role that bonuses and commissions play in employee compensation, the DOL is now considering whether to include nondiscretionary bonuses and incentive payments toward partial satisfaction of the standard salary test. Currently, such compensation is only included in calculating total annual compensation under the HCE test. The Department is considering whether compensation such as a nondiscretionary bonus for meeting specified performance metrics, in combination with a minimum weekly salary amount, should be counted toward satisfying the standard salary test. Despite reservations it expresses in the proposed rulemaking, the DOL is also considering whether to include commissions as part of nondiscretionary bonuses and other incentive payments that could partially satisfy the standard salary test. However, the Department is not considering expanding the salary level test calculation to include discretionary bonuses, nor changing its longstanding exclusion of board, lodging, insurance, or retirement contributions.

Despite the proposed expansion, the DOL intends to sharply limit both the amount of the salary test that could be satisfied through nondiscretionary bonuses and incentive payments and the frequency such payments must occur. Because the only compensation guaranteed to exempt employees is the standard salary, the proposed regulations suggest a 10 percent cap on the amount of the salary requirement that might be satisfied by nondiscretionary bonuses and incentive payments. For the same reason, the DOL believes that such bonus or incentive payments, if allowed, would need to be paid monthly or more frequently.

Though the proposed regulations are not final, employers should begin evaluating their compensation practices to determine how the new salary threshold will impact their workforce. Based on the DOL’s comments, these changes should give employers more options to meet the new salary threshold and stay compliant with the FLSA.