In order to be exempt from overtime under the federal Fair Labor Standards Act (FLSA), white collar workers generally must satisfy both the "salary basis" and "duties" tests. In July 2015, the Department of Labor (DOL) issued a notice of Proposed Rulemaking primarily focused on raising the salary threshold, and asking for public comment on its plans. We previously highlighted the Proposed Rule here. The Department received more than 270,000 comments in response. On May 18, 2016, the DOL issued its Final Rule updating the regulations for the so-called "White Collar Exemptions" - i.e., Executive, Administrative and Professional employees - and Highly Compensated Employees (HCEs), increasing the minimum salary requirements for those workers, effective December 1, 2016.
The Final Rule more than doubles the salary requirement for the White Collar Exemptions, increasing it from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The new threshold sets the salary at the 40th percentile of weekly earnings for full-time workers in the lowest-wage Census Region (currently in the South). The salary basis in the Final Rule is slightly lower than the $970/week that was initially proposed. Labor Secretary Thomas Perez indicated that the lower figure reflects concerns raised in the public comments.
The salary basis threshold for HCEs was likewise increased, from $100,000 to $134,004 per year, setting the compensation level at the 90th percentile of earnings of full-time workers nationally.
The salary basis for white collar workers and HCEs will be updated every three years, to maintain the 40th and 90th percentile levels reflected above. Thus, at the first scheduled update on January 1, 2020, the salary basis for the White Collar Exemptions is projected to exceed $51,000 per year.
For the first time, and subject to certain requirements, employers will also be able to use nondiscretionary bonuses and incentive payments to satisfy up to 10% of the salary basis test for the White Collar Exemptions. HCEs, on the other hand, must meet the standard salary amount each pay period (i.e., $913/week), without regard to bonuses or incentive payments, although such payments can count toward the total annual compensation requirement.
The Final Rule does not make any changes to the "duties" tests for the White Collar Exemptions or HCEs.
The DOL predicts that, without intervention from their employer, 4.2 million workers will be misclassified as exempt as a result of the Final Rule.
What does this mean for you? In anticipation of the December 1 effective date, employers should review their workforce to determine which employees currently classified as exempt make less than the minimum of $913 per week. Those employees will either need a raise in their compensation in order to remain exempt, or be reclassified as non-exempt, and thus eligible for overtime. In the latter circumstance, companies should message the transition carefully, and implement processes for the reclassified employees to start tracking their time. The workers who were formerly exempt may also need training regarding when and how they work, e.g., not working from home in the evening, or responding to emails in their "off duty" time. Employers should also review their policies and practices related to overtime work, and assess the potential financial impact of having additional overtime-eligible employees.
This client update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have any questions regarding this update, or for more information about this topic, please contact any of the attorneys in our Labor & Employment group, or the attorney with whom you normally consult.