New Department of Labor Regulations: Are you Paying your Exempt Employees Enough to Avoid Overtime Pay Requirements?

May 18, 2016

Effective December 1, 2016, employees classified as exempt from overtime pay under the executive, administrative and professional exemptions of the Fair Labor Standards Act must be paid at least $47,476 per year (up from $23,660) in order to remain properly classified as overtime-exempt. 


The FLSA provides exemptions from the minimum wage and overtime pay requirements for employees “employed in a bona fide executive, administrative, or professional capacity” (often referred to as the “white collar” exemptions).  The white collar exemptions are premised on a belief that the exempted workers typically earn salaries well above the minimum wage and enjoy other privileges to compensate them for their long hours of work, such as above-average fringe benefits, greater job security, and better opportunities for advancement.


Generally, the white-collar exemptions require each of three tests to be met for the 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 of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).


In March 2014, President Obama signed a Presidential Memorandum directing the Department of Labor to update the regulations defining which white collar workers are protected by the FLSA's minimum wage and overtime standards, noting that the regulations “have not kept up with our modern economy,” and that, as a result, “millions of Americans lack the protections of overtime and even the right to the minimum wage.”  On May 18, 2016, the DOL published the Final Rule updating the overtime regulations, which it believes will extend overtime pay protections to over 4 million workers within the first year of implementation. 


Increased Salary Level for White Collar Workers

The Final Rule raises the minimum salary level for the white collar exemptions by over 100%, from $455 per week to $913 per week, or $47,476 annually.  This rate was set to equal the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. 


Some good news for employers is that, for the first time, employers are permitted to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of this new standard salary level, as long as these forms of compensation are paid at least quarterly.  Where an employee’s total salary does not meet the standard salary level in any one quarter, the rules permit a quarterly “catch-up” payment.  As the DOL explains it:


each pay period an employer must pay the exempt executive, administrative, or professional employee on a salary basis at least 90 percent of the standard salary level . . . and, if at the end of the quarter the sum of the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 13 weeks, the employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level).


Increased Total Compensation Level for Highly Compensated Employees

The Final Rule also raises the total annual compensation requirement for highly compensated employees from $100,000 annually to $134,004 annually, which is equal to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally based on data from the fourth quarter of 2015.  Highly compensated employees must receive at least $913 per week on a salary or fee basis, while the remainder of the total annual compensation may include commissions, non-discretionary bonuses, and other non-discretionary compensation.  An employer is permitted to make a final “catch-up” payment during the final pay period or within one month after the end of the 52-week period to bring an employee’s compensation up to the required level.


Automatic Increases

To avoid having the salary and compensation levels become outdated, the Final Rule establishes a mechanism to automatically raise the levels every three years (on the first of the year), beginning January 1, 2020.  The DOL will automatically update the standard salary level test by maintaining the salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, and will update the annual compensation requirement for highly compensated employees by maintaining this level at the annualized value of the 90th percentile of the weekly earnings of full-time salaried workers nationwide.


The Final Rule makes no changes to the duties test.


What this Means for Employers

As of December 1, employees who are currently properly classified as exempt executive, administrative, professional or highly compensated employees may lose the benefit of the overtime exemption if their compensation is not in line with the new DOL requirements.  Before this deadline approaches, employers must identify the employees who will be impacted and determine how to comply with the new rules.  For instance, employers can increase employees’ salaries to the new minimum levels, can add non-discretionary bonuses and incentive payments to the employees’ compensation packages, or can reclassify the employees to non-exempt.  If an employee will be reclassified to non-exempt, the employer must determine an appropriate hourly rate, taking into account any expected overtime hour requirements.


This would also be a good time for employers to audit all prongs of the relevant exemption tests - including the duties test - to ensure that all employees are properly classified, and make any necessary modifications. 


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