Last week, the Department of Labor (“DOL”) published its long-awaited final rule modifying the salary basis test for the administrative, executive, and professional exemptions under the Fair Labor Standards Act (“FLSA”). The DOL's Final Rule doubles the minimum salary threshold from $23,660 to $47,476 per year for “white collar” employees to qualify as exempt from the FLSA’s overtime pay requirements. The Final Rule also raises the minimum salary level for highly compensated employees (“HCEs”) from $100,000 to $134,004 per year. The DOL’s announcement of the Final Rule, which takes effect on December 1, 2016, can be found here, and the major changes are summarized in the table below.
Notably, going forward, the minimum salary thresholds will be updated every three years beginning on January 1, 2020. The Final Rule also broadens the definition of salary basis to allow employers to include nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum weekly salary requirement. The Final Rule did not make any changes to the primary duties test, despite indications that the DOL was considering a change.
In light of this drastic increase, employers should act now to identify employees who fall below the new $47,476 minimum to ensure compliance with the new regulation when it goes into effect on December 1, 2016. It is important to note that there is no grace period for compliance after the Final Rule goes into effect. For affected employees, estimated to be more than 4 million, employers will either need to raise their pay to meet the new minimum salary requirements or reclassify them as nonexempt employees whose wages must be calculated on an hourly basis. Although the latter seems to be more attractive from a financial standpoint, it raises a number of concerns that should be carefully considered. As previously exempt employees will be entitled to overtime pay for time worked in excess of 40 hours per week, employers will need to ensure that they maintain proper time records and should consider restrictive overtime policies to control overtime pay obligations. Alternatively, employers may look to creative options, such as redistribution of work or outsourcing, to manage their payroll costs.
On top of the decision itself, employers should thoughtfully consider how and when to communicate changes resulting from the Final Rule. Previously exempt employees may view their conversion to non-exempt as a demotion, particularly if they are restricted from working overtime, which to them would be a de facto pay cut. Others may feel they were entitled to overtime pay all along, leading to difficult conversations and possibly even litigation. We also expect to see a spike in FLSA litigation after the regulations are implemented as employers struggle to ensure previously exempt employees comply with administrative requirements imposed on non-exempt employees, such as ensuring daily clock-ins/clock outs, prohibiting working off the clock, etc.
Far from a one-size-fits-all solution, the best approach will be one tailored to your organization's culture and business needs. Although six months seems to be plenty of time to address the new rule, employers should not and cannot afford to wait until December 2016 to analyze its impact on their work force.
Click here to view the table.