Last night the U.S. Department of Labor announced details of its long-awaited Final Rule on changes to the regulations interpreting the overtime exemptions to the Fair Labor Standards Act (FLSA). The FLSA is the federal law requiring most employers to pay minimum wages and overtime to nonexempt employees. The Final Rule raises the minimum salary an exempt employee must be paid qualify under most frequently used overtime exemptions. The change is expected to make an additional 4.2 million workers eligible for overtime and is expected to impact managers at retailers, hotels and restaurants. While the impact may be greatest felt in those businesses, the rule is not limited to those industries. The Final Rule made no changes to the duties test necessary to qualify for exempt status.
The new rule takes effect December 1, 2016. This gives employers two hundred days to prepare. Exempt employees who do not exceed the minimum salary threshold for the salary basis after December 1, 2016 will lose the exemption.
To satisfy the new salary threshold for an exemption requiring an employee be paid on a salary basis, the employee must make an annual salary of $47,476 ($913 per week) up from $23,660 per year ($455 per week). This is a slight decrease from the proposed salary threshold that was published in the proposed rule. The rule also raises the salary threshold to qualify as a “highly compensated employee” from $100,000 to $134,004. This is over a $10,000 increase in the salary that was originally proposed by the Department in the proposed rule.
Nondiscretionary bonuses and incentive payments (including commissions) can satisfy up to 10 percent of the standard salary level so long as those payments are made on a quarterly or more frequent basis. Employers with shortfalls may make catch-up payments as well.
The salary threshold is set to adjust every three years and is tied to equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. The salary threshold for the highly compensated exemption is also set to automatically adjust ever three years and is tied to the 90th percentile of annual earnings of full-time salaried workers nationally.
Employers should act now to take steps to prepare for the effective date. Preparations include identifying exempt positions where an employee is making less than the new salary threshold. For each of those positions, the employer must determine how it will treat that employee beginning on December 1, 2016. Options include:
- Increasing the employee’s salary to meet the new, higher threshold and maintain the exemption;
- Convert the employee to nonexempt, track hours and pay overtime; or
- Limit the employee to 40 hours per week.
Additionally, employers should begin preparing their communications to employees who will no longer qualify for the exemption after December 1st to explain the change; the reasons for the changes; and how the changes will impact how the employee reports his or her time and will be paid.
You can access additional information about the new Final Rule below:
If you need additional information about the impact on these changes or how to prepare for and comply with these changes, don’t hesitate to reach out to me.
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