On May 18, 2016, the Obama Administration announced publication of the Department of Labor’s Final Rule updating the overtime regulations, and extending overtime pay to over 4 million workers within the first year of implementation. The Final Rule will go into effect on December 1, 2016.
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional (“EAP”) workers to be exempt. These exemptions are sometimes referred to as the white collar exemptions. Since 1940, the Department’s regulations have generally required each of three tests to be met for the EAP exemption to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity or work performed (“salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”). Employees with an annual salary that meets the definition of a highly compensated employee (currently $100,000 annually) are subject to a minimal duties test. The Department last updated these regulations in 2004, when it set the weekly salary level at $455 ($23,660 annually) and made other changes to the regulations.
The Final Rule updates the salary level required for the EAP exemption to $913 per week ($47,476 annually). The Final Rule also sets the total annual compensation requirement for highly compensated employees at $134,004. In addition, the Final Rule establishes a mechanism for automatically updating the salary and compensation levels every three years. Finally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. The Final Rule makes no changes to the duties tests.
Employers must take steps now to ensure that compliance with the Final Rule will occur by December 1, 2016. To determine whether a white collar employee is exempt under the Final Rule, employers should assess how the employee is paid (salary basis test), how much the employee earns (salary level test) and whether the employee primarily performs the kind of job duties that Congress meant to exclude from the law’s overtime provisions (duties test). Job titles never determine exempt status under the FLSA. Over-time eligible employees may be paid a salary and do not need to be paid on an hourly basis. That is, salaried workers may be eligible for overtime.
Some options employers have for responding to the changes in the salary level under the Final Rule are: (1) raise salaries to maintain exemption, (2) pay current salaries, with overtime after 40 hours, (3) reorganize workloads, adjust schedules, or spread work hours, or (4) adjust wages. For further assistance understanding your responsibilities and options for complying with the FLSA’s overtime provisions, you should contact your employment law attorney.