On May 18, 2016, the Department of Labor ("DOL") announced changes to the overtime rules of the Fair Labor Standards Act (“FLSA”). The DOL’s "Final Rule" substantially impacts the classification of employees as “exempt” under the so-called "white collar" exemptions (executive, administrative, or professional). DOL’s new rules dramatically increases the minimum compensation threshold for classifying employees as exempt under one of the white collar exemptions. The new provisions rules take effect on December 1, 2016.
Key Points of the DOL’s Final Rule
DOL’s new rules significantly alter the minimum compensation standards for exempt employees as follows:
- The minimum salary level requirement for the white collar exemptions is increased from the previous $455 weekly rate (the equivalent of $23,660 per year) to a weekly rate of $913 (the equivalent of $47,476 per year). For highly compensated employees the minimum salary requirement increased from a salary requirement of $100,000 annually to $134,004 annually.
- Non-discretionary bonuses, incentive payments, and commissions may account for up to ten percent (10%) of the minimum required salary level for exempt employees, provided those amounts are paid at least quarterly. According to the DOL, this provision was a response to comments from the business community and recognizes the importance these forms of pay have in many companies’ compensation arrangements.
- Minimum compensation levels for exempt employees will be updated every three years beginning on January 1, 2020. Minimum salary levels for exempt employees will be adjusted to reflect the level of the fortieth (40th) percentile of full-time salaried workers in the lowest-wage national Census region. In addition, the highly compensated individual salary threshold will adjust to reflect the ninetieth (90th) percentile of full-time salaried workers nationally.
The new DOL compensation rules do not impact the "duties tests" applicable to executive, administrative, or professional employees.
What this Means for Private Employers
Employers must begin preparing now, in anticipation of the December 1, 2016 effective date.
- Employers should identify those employees affected by the increased salary thresholds and determine whether those employees’ salaries need to be raised in order to maintain their exemption or the employees should be reclassified as nonexempt.
- In deciding between the above two alternatives, employers may wish to track and examine the hours worked by affected employees to determine which employees work more than forty hours per workweek and thereby calculate potential overtime exposure if employees are reclassified as nonexempt.
- Employers also should anticipate in their long-range forecasts and budgeting for the automatic salary threshold adjustments every three years, which begins January 1, 2020. The DOL will publish the updated salary adjustment rate in the Federal Register at least 150 days before the January 1, 2020 effective date. The new salary and compensation levels will also be posted on the DOL website.
The Final Rule issued by the DOL is anticipated to expand the number of "white collar" employees nationwide who are entitled to overtime pay as non-exempt employees by approximately four million employees nationwide. Because overtime wage and hour claims are the frequent subject of litigation, employers are well advised to consult with counsel or conduct a careful review of their own employee classifications to ensure compliance by the December 1, 2016 effective date.
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