After receiving and reviewing more than 270,000 public comments, on May 18, 2016, the U.S. Department of Labor (DOL) released its much anticipated Final Rule regarding overtime pay eligibility for certain “white collar workers” under the Federal Fair Labor Standards Act (FLSA).
The changes are dramatic. The DOL estimates approximately 4.1 million workers will become eligible for overtime pay, and another 100,000 will receive salary increases to meet the new minimum salary threshold. Under the FLSA, non-exempt employees are entitled to overtime pay of 1.5 times an employee’s “regular rate of pay” for all hours worked over 40 in a workweek.
Below are the notable highlights of the Final Rule:
1. A Doubling of the Minimum Salary Threshold: The Final Rule for the Executive, Administrative and Professional (EAP) Exemptions raises the minimum salary level from its current level of $455 per week ($23,660 annualized) to $913 per week ($47,476 annualized) in 2016. This new threshold represents the 40th percentile of full-time salaried workers in the “lowest wage Census region” (currently the south).
2. 34% Increase to Minimum Salary Necessary for the Highly Compensated Employee Exemption: The Final Rule raises the total annual compensation required to qualify for the Highly-Compensated Employee (HCE) exemption from $100,000 to $134,004 annually. This threshold represents the 90th percentile of full-time salaried workers nationally. Employers can still make one catch-up payment to satisfy the new HCE salary threshold “during the last pay period or within one month after the end of the 52 week period.”
3. Automatic Updating of Salary Thresholds Every Three Years: The DOL’s Final Rule will automatically update the salary threshold every three years, beginning January 1, 2020. Each salary update will raise the minimum threshold to the 40th percentile of full-time salaried workers in the lowest wage Census region. That threshold is estimated to rise to $51,168 in 2020. The HCE threshold will also automatically update to the 90th percentile of full-time salaried workers nationally and is estimated to rise to $147,524 on January 1, 2020. The Final Rule requires the DOL to post the new salary levels 150 days in advance of their effective date (i.e. on or about August 1, 2019).
4. Non-salary compensation and catch-up payments can be utilized to meet the salary threshold: The Final Rule gives employers some flexibility by allowing them to include non-discretionary bonuses, incentive pay and/or commissions to meet the new EAP salary threshold. However, in order to be included, these payments must be made on at least a quarterly basis and cannot exceed more than 10% of the required salary threshold. The Final Rule also permits employers to make a catch-up payment not exceeding the 10% limit once per quarter to meet the EAP salary threshold.
5. No Changes to the “Duties Tests”: In order to classify an employee as exempt from the FLSA’s overtime pay requirements, an employer must establish that the employee satisfies both the minimum salary threshold and the “duties test” for the particular exemption. Each exemption has its own set of duties that an employee must perform. In its proposed rules, the DOL had solicited public comment on whether to change any of the “duties tests” for the EAP exemptions but ultimately made no changes. Of course, employers must still make sure their exempt employees satisfy the current duties tests of the exemptions they rely on.
6. Effective Date of December 1, 2016: In somewhat of a surprise, the DOL has given employers more than six months to come into compliance with the Final Rule, as the new salary thresholds go into effect on December 1, 2016. Employers were concerned that the DOL would give them as little as 60 days to come into compliance. Given the significance of the changes, however, this slightly lengthier implementation period is justified.