Today, the U.S. Department of Labor (DOL) released its highly anticipated final revisions to the Fair Labor Standards Act’s (FLSA) so-called “white collar” exemptions, the first major update to the federal overtime rules in more than a decade. Although the final rule is somewhat similar to the proposed rule published by the DOL last summer, it does contain at least one notable difference: namely, that the pay threshold for exempt employees will increase from $455/week to “only” $913/week, rather than $970/week as initially proposed. In addition, despite rampant speculation, the final rule does not modify the “duties” tests associated with the exemptions.
Background The FLSA generally requires that all employees be paid at least the federally mandated minimum wage (currently, $7.25/hour) plus time-and-a-half for all overtime hours – i.e., all hours worked above 40 in a given workweek. The law, however, contains exemptions for, most notably, bona fide executives, administrators, and professionals (known more commonly as the “white collar” exemptions). These overtime exemptions eliminate the hourly minimum wage and overtime requirements for employees who (1) are paid a fixed salary that meets the FLSA’s threshold “salary basis/level” test and (2) satisfy the duties test for a recognized exemption.
The current minimum salary that must be paid to qualify for the “white collar” exemptions is $455/week. In addition, an exempt employee’s salary may not fluctuate from week to week. Rather, subject to a few narrow exceptions, such salary must remain constant regardless of the number of hours worked or quality of work performed. Fluctuations, even sporadically, in an exempt employee’s salary, may forfeit an employer’s right to claim that an employee is exempt.
The June 2015 Proposed Overtime Regulations In March 2014, President Obama directed the DOL to modernize existing regulations for the “white collar” exemptions. In response, the DOL began preparing a proposed regulation, which was expected to narrow these exemptions by: (1) increasing the salary threshold for exempt employees and (2) modifying the respective duties tests to make it more difficult to classify employees as exempt.
In June 2015, the DOL published the proposed regulation, surprisingly addressing only the exemptions’ salary requirement. Specifically, the DOL proposed to more than double the minimum salary for exempt employees, from slightly less than $24,000/year to $50,440 (or $970/week). While the DOL did not propose changes to the duties tests, it sought “comments on whether the current duties tests are working as intended to screen out employees who are not bona fide ‘white collar’ exempt employees.”
The Final Overtime Regulations After reviewing thousands of stakeholder comments on the proposed regulation over many months, the DOL issued the final overtime rule today. Most notably, the final rule:
- Increases the weekly salary threshold for exempt executive, administrative, and professional employees to $47,476 per year (or $913/week), less than last summer’s proposal. This means that salaried employees earning less than this amount, regardless of job duties, must be compensated for overtime work.
- Automatically updates the salary level for the “white collar” exemptions every three years, beginning on January 1, 2020. Each update will index the salary level for exempt employees to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region. At present, the DOL expects that the 2020 update will raise the salary threshold to $51,168/year ($984/week). Beginning August 1, 2019, the DOL will post the new salary levels 150 days in advance of their effective date.
- Allows up to 10% of the salary threshold for exempt executives, administrators, and professionals to be satisfied by non-discretionary bonuses, incentive pay, or commissions, provided that such payments are made on at least a quarterly basis.
- Increases the annual compensation level for the “highly-compensated employee” exemption, an amalgam of the “white collar” exemptions, from $100,000 to $134,004 (of that, at least $913/week must be paid on a salary basis). This will be updated every three years, also beginning on January 1, 2020, by indexing such compensation to the 90th percentile of income for full-time salaried workers nationally. The DOL currently expects the salary threshold for this exemption to rise to $147,524/year in 2020.
- Does not modify the duties tests associated with the “white collar” exemptions.
The full text of the final rule can be found here.
Tips for Employers The new regulations take effect on December 1, 2016. In advance of the effective date, employers should:
- Review all categories of employees who may be affected by the final regulation and make adjustments as necessary. Options include:
- Increasing the salaries of currently exempt employees to meet the new threshold (which will change every three years)
- Converting currently exempt employees to non-exempt status and paying them an hourly wage and overtime if actually worked, or converting such employees to non-exempt but capping their workweek at 40 hours and barring unauthorized overtime (although all overtime hours worked, even if unauthorized, must be compensated)
- Reducing the number of staff or the hours of current staff members
- Adding staff so that fewer employees are needed to work overtime hours
- Utilizing the fluctuating workweek method of compensating newly-converted non-exempt employees
- Raising prices to offset additional labor costs imposed by the final overtime rule
- Consider updating and/or implementing relevant policies, including rules regarding the reporting of hours worked (to ensure that all non-exempt workers keep precise time records) and the maximum number of hours worked per week without authorization by a supervisor.
- Provide training to the affected employees (including those responsible for ensuring compliance). For instance, newly non-exempt employees will likely need to be trained on timekeeping policies and procedures.
Consult with counsel immediately to evaluate these and other considerations.
Client Alert 2016-132