Consider this your three-month warning. The time has come for employers nationwide to begin preparing for new Department of Labor (“DOL”) overtime exemption requirements. On May 18, 2016, the DOL announced publication of its final rule updating the regulations governing whether executive, administrative, and professional employees (“White Collar Exemptions”) are entitled to minimum wage and overtime under the Fair Labor Standards Act (“FLSA”). The final version of the regulations may be viewed here. The revised regulations are slated to take effect December 1, 2016, unless Congress acts on stalled legislation to nullify the proposed regulations, and that does not appear likely. Also worth noting, the revised regulation will be subject to Congressional review after the election in accordance with the Congressional Review Act. Despite these potential hurdles, the revised regulations will likely take effect December 1, 2016.
Under the current regulations, an employee is considered exempt if the employee satisfies the duty requirements and is paid at least $455 per week ($23,660 annually). The revised regulations change the pay threshold salary required to be exempt to $913 per week ($47,476 annually). This figure is based on the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers in the lowest wage earning Census Region, currently the South. The revised regulations also increase the highly compensated employee exemption annual salary threshold from $100,000 annually to $134,004. This figure is based on the standard salary level at the 90th percentile of weekly earnings for full-time salaried workers nationally.
Additionally, the revised regulations include a mechanism to automatically update the salary threshold every three years, beginning January 1, 2020. The standard salary will be updated to maintain a threshold equal to the 40th percentile of weekly earnings for full-time salaried workers in the lowest wage earning Census Region. Similarly, the highly compensated employee salary will be updated to maintain a threshold equal to the 90th percentile of annual earnings of full-time salaried workers nationally. Fortunately, the revised regulations do not alter the existing duty tests for any of the White Collar Exemptions.
Notably, the revised regulations do allow nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary threshold ($47,476 annually). The DOL’s original proposal failed to provide guidance on whether bonuses could be included in the determination of meeting the standard salary threshold. Ultimately, a compromise was struck allowing bonuses to satisfy up to 10 percent of the standard salary threshold, but the revised rule prohibits employers from including nondiscretionary bonuses and incentive payments to satisfy the highly compensated employee salary threshold. Finally, employers may not apply contributions towards employees’ health care plans to satisfy the standard or highly compensated salary thresholds.
The DOL estimates the revised rule will cast a broad net making an additional 4.2 million employees eligible for overtime under the FLSA. The revised rule is certain to result in both financial repercussions and uncertainty for employers. Specifically, the DOL estimates the revised rule will result in approximately $295 million per year in costs to employers. Uncertainty will remain as employers scramble to determine whether under the revised rule certain positions remain exempt by the FLSA’s White Collar Exemptions.
Time continues to tick away, with only three months until the revised rule takes effect. Employers are advised immediately to begin a review process to determine (1) whether their salaried employees satisfy the duties and salaries components of the FLSA White Collar Exemptions, (2) identify positions that will require reclassification under the revised rule, (3) analyze the financial impact of reclassifying employees as nonexempt, (4) review whether certain tasks may be reassigned to minimize the effects of the revised rule, (5) consider the impact of reclassification on your organizations finances, and the reactions of affected employees, and (6) be prepared to conduct reviews moving forward as the salary components may fluctuate every three years, beginning January 1, 2020.
A one-page summary of the new provisions is provided here
This client alert is intended to inform clients and other interested parties about legal matters of current interest and is not intended as legal advice.