As discussed in our July 2, 2015 Update, the U.S. Department of Labor (DOL) proposed new rules to significantly increase the salary thresholds for employees to qualify as exempt from overtime under the Fair Labor Standards Act (FLSA). On May 18, 2016, the DOL issued the final rules. The new rules become effective on December 1, 2016, giving employers a little more than six months to prepare. The DOL claims that the new rules will provide overtime pay to 4.2 million workers who are not entitled to overtime under current law.
The most significant changes for employers are summarized below.
The Increased Standard Salary Threshold - The DOL's new rules raise the standard salary threshold used to determine whether most "white collar" workers (professional, executive, and administrative employees) are exempt from overtime pay to $913 per week ($47,476 per year), which is more than double the current $455 per week ($23,660 per year). The new threshold is based on the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage Census region in the country (currently the South).
Computer Employees - Under the new rules, this exemption will require an employee to be paid (a) at or above the standard threshold ($913 per week) or (b) at least $27.63 per hour (which is the hourly rate under the current regulations). Exempt computer employees include computer systems analysts, computer programmers, software engineers, and other similarly skilled workers in the computer field.
Highly Compensated Employees ("HCE") - Under current rules, employees making more than $100,000 annually who perform limited exempt white collar duties are exempt from the requirement of overtime pay. Under the new rules, workers will only qualify for the HCE exemption if they are paid at an annual compensation level equal to or greater than the 90th percentile of earnings of full-time salaried workers in the country (currently $134,004) per year and are paid at least the standard salary amount ($913) per week.
Automatic Increases in the Salary Thresholds - Beginning on January 1, 2020, and every three years thereafter, the salary thresholds will be updated. The new thresholds will be published by the DOL at least 150 days in advance.
Bonus and Incentive Payments - The new rules will permit employers to count non-discretionary bonus and incentive payments (including commissions) to satisfy up to ten percent (10%) of the standard ($913 per week) salary level, provided that such payments are made on a quarterly or more frequent basis. Most such payments will be considered "non-discretionary" where the employer states in advance that it will make the payment if specified conditions are met. This is a change from existing rules under which such supplementary compensation is not counted towards meeting the salary threshold. The new rules also provide a short window for employers to make "catch-up" payments each quarter if necessary to reach the salary threshold.
The 10% limit does not apply to the HCE exemption. To qualify for the HCE exemption, an employee must be paid at least the standard weekly salary level ($913) and the remainder of the employee's total compensation may include non-discretionary bonuses and other incentive payments.
The "Duties Test" - In addition to being paid on a salary basis at or above the salary threshold, an employee must satisfy the "duties test" to qualify as an exempt executive, administrative, or professional employee. To satisfy this test, an employee's "primary" duties must involve exempt characteristics set forth in the DOL's regulations. The DOL invited comments regarding what, if any, changes should be made to the duties test and suggested that it might specify 50% as the minimum portion of an employee's time that must be spent doing exempt work in order to qualify for the white collar exemptions. The final rules do not change the duties test.
WHAT SHOULD EMPLOYERS DO BEFORE DECEMBER?
Decide How to Treat Exempt Employees Currently Making Less Than the New Salary Thresholds - Employers should review the status of all employees currently classified as exempt who make less than the new salary thresholds for white collar, highly compensated, and computer employees. Employers have a number of available options to address the changes required by the new rules with respect to these employees, such as:
• Raising salaries and/or adjusting non-discretionary bonuses or incentive payments to retain exempt status. This option may result in increased compensation for employees already above the new thresholds or lead to morale issues due to salary compression.
• Reorganizing workloads and/or adjusting schedules to avoid (or limit) non-exempt employees from working more than 40 hours in a week. Some commentators have noted that in addition to reduced hours, this option may result in decreased compensation for some employees.
• Converting the employee to an hourly rate.
• Setting a salary and paying overtime (at 1.5 times the regular rate) for work over 40 hours per week.
• Setting a salary for an employee who regularly works more than 40 hours per week to cover his/her straight time hours up to a specified number of hours per week. Under this option, overtime for hours between 40 and the specified number of hours will be paid at 0.5 times the employee's regular rate and overtime for hours which exceed the specified number of hours will be paid at 1.5 times the employee's regular rate.
• Paying a fixed salary which covers the straight time pay for a fluctuating number of hours per week. Under this method, overtime for hours worked over 40 in a week is paid at 0.5 times the employee's fluctuating regular rate. DOL regulations set forth conditions which must be met to qualify for the fluctuating work week method.
Under several of these options, it may be possible to design an hourly wage-rate or salary to result in paying the employee about the same amount (for a projected number of hours) as the employee had previously been paid.
Review Recordkeeping Procedures - While the new rules do not make changes to the FLSA's recordkeeping requirements, employers must take action to keep an accurate record of the hours worked by all employees who become non-exempt under the new rules.
Many employees who will no longer be exempt are not accustomed to reporting the hours that they work. In addition to their regular work hours, they may frequently check and respond to e-mails and texts and perform work at home or away from the workplace. Employers will need to establish and maintain a system for accurately recording all of the time such employees work. While doing so may have an adverse effect on the morale of such employees, the failure to do so exposes an employer to significant potential liabilities.
Review the Status of Other Employees Currently Classified as Exempt - The new rules have received broad media coverage, and many employees expect that changes will occur. At the same time as the status of employees is changed as a result of the new rules, employers may want to review the status of all employees classified as exempt and change the status of any misclassified employee.
Below are links to some of the documents issued by the DOL regarding the new rules.
Questions and Answers
Private Employer Technical Guidance Document
Small Business Guide
Non-profits and the FLSA
Non-Profit Technical Guidance Document
If you have questions about the final overtime rules or need assistance implementing changes contact: