On May 18, 2016, the U.S. Department of Labor announced a final rule calling for changes to the regulations governing the three white collar (executive, administrative and professional) exemptions from overtime under the federal Fair Labor Standards Act. The final rule, which follows a proposed rule issued in July 2015, takes effect December 1, 2016.
Unless specifically exempted, employers must pay employees covered by the FLSA overtime pay - equal to at least 1.5 times their regular hourly rate of pay - for all hours worked in excess of 40 in a workweek. White collar employees are exempt from the overtime requirement if they satisfy three tests: (1) employees must be paid a minimum salary level determined by regulation; (2) employees must be paid on a salary basis not subject to reduction based on quality or quantity of work rather than, for example, on an hourly basis; and (3) employees’ primary job duty must involve the kind of work associated with exempt executive, administrative or professional employees.
In addition, certain highly compensated employees (HCEs) are exempt from overtime if they are paid the standard salary required for white collar employees on a salary basis, plus additional compensation that brings them to a higher required salary amount, and pass a minimal duties test.
The final rule makes several changes to the test for exempt status:
- Salary level: the final rule increases the minimum required salary level by 101% from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). For employers in NYS, where the minimum required salary level was already among the highest in the nation at $675 per week ($35,100), the new standard represents a 35% increase. The new required salary level is equal to the 40th percentile of earnings of full-time salaried workers in the lowest Census region, currently the South. The final salary level is slightly lower than the $970 per week ($50,440 annually) in the proposed rule, but still represents a significant increase over the current salary requirement.
- Bonuses and Incentive Payments Count: The final rule amends the salary basis test to allow employers to count non-discretionary bonuses and incentive payments (including commissions) toward up to 10 percent of the new salary level for white collar employees. To count, such payments must be made on a quarterly or more frequent basis. Previously, employers were not permitted to count any portion of non-discretionary bonuses or incentive/commission payments toward the required salary threshold.
- Highly Compensated Employees: The final rule increases the compensation requirement for HCEs by 34% from $100,000 to $134,004, which is equivalent to the 90th percentile of earnings for all full-time salaried workers nationally. The final salary of $134,004 is an increase over the $122,148 in the proposed rule.
- Automatic Updates: The final rule establishes a mechanism to automatically update the salary and compensation levels described above every three years, with the first automatic increase scheduled for January 1, 2020. Automatic increases will be calculated using the formulas above for the white collar salary level (90th percentile for full time salaried workers in the lowest Census region) and HCEs (90th percentile for full time salaried workers nationally). DOL will publish updated amounts in the federal register and post them on its website at least 150 days in advance of their effective date. The final rule’s inclusion of an automatic updating mechanism is a departure from prior rules. The DOL last implemented an increase to the salary levels in 2004, and had proposed annual updates in the proposed rule.
The final rule does not change the duties tests, although many of the 270,000+ comments received on the proposed rule requested that the DOL include examples of how to apply the duties tests in the final rule.
The changes required by the final rule will require employers who have exempt employees with salaries falling under the new salary threshold to weigh and carefully consider a number of alternatives for bringing their pay practices into compliance with the final rule. Possible options include, but are not limited to:
- Not making any changes if employees don’t work over 40 hours in a workweek (because no overtime pay will be required);
- Increasing salaries to the new salary level to allow employees to retain exempt status and avoid overtime eligibility;
- Paying overtime for any work in excess of 40 hours in a single workweek;
- Reducing or eliminate overtime hours to avoid overtime payments; or
- Reducing the amount of pay allocated to base salary so that, when coupled with overtime pay for hours in excess of 40 in a single workweek, total pay is held constant.
When reviewing salary levels, employers should also review job duties to make sure that the work is truly of an exempt nature.
Harter Can Help
If you have any questions regarding this article or would like more information on how the changes affect your business, please contact any one of our employment and labor attorneys.