New Overtime Exemption Regulations Are Coming. What Will They Mean for You and Your Business?

• DOL estimates that the changes will impact 4.2 million workers.
• The final rule raises the minimum salary level from $23,660 per year to $47,476 per year.
• The new regulations go into effect on December 1, 2016.

Overview of Changes

The U.S. Department of Labor (DOL) published the final rule revising the “white collar” overtime exemption regulations on May 18, 2016. This publication was the result of a process that began in March 2014 when President Obama directed the Secretary of Labor to review and “modernize” the current overtime regulations. In the final rule, the DOL estimates that the changes will impact 4.2 million white collar workers.

The most significant change made by the final ruling raised the minimum salary level for the white collar—executive, administrative and professional—exemptions under the Fair Labor Standards Act (FLSA). The final rule raises the minimum salary level from $455 per week, or $23,660 per year, to $913 per week, or $47,476 per year. An individual earning below that threshold will not fall under the white collar exemptions from overtime pay. The final rule permits additional compensation – such as bonuses and commissions – to satisfy up to 10% of the minimum salary level. The final rule also raises the salary requirements for highly compensated employees from $100,000 per year to $134,004 per year. For the first time, the DOL has included a mechanism to automatically increase both of these salary levels. The new regulations go into effect on December 1, 2016.

Key Changes

Minimum Salary Level:

• $913 per week or $47,476 annually

Non-Discretionary Bonuses & Commissions:

• Can be used to satisfy up to 10% of the new minimum salary requirements
• Must be paid at least quarterly
• One time shortfall payment established (to be paid quarterly) to satisfy minimum salary requirement
• Shortfall payment must be paid no later than the first pay period following the end of the quarter
• If compensation falls below the salary requirement and the shortfall payment is not made then the employee will be owed overtime pay for all hours worked over 40 per week during the previous quarter

Highly Compensated Employees:

• New minimum salary requirement set at $134,004 per year to be considered highly compensated

Automatic Increases:

• Automatic increases will take place every three years
• First update scheduled for January 1, 2020

Effective Date:

• The new changes will go into effect on December 1, 2016

What Did Not Change

No Changes Were Made To The Exemptions For:

• Outside Salespeople
• Teachers
• Lawyers
• Doctors

Duties Test Unchanged:

• The final rule does not change the duties tests
• The threshold duties required of exempt employees covered by the white collar exemptions must still be met
• There are no changes to the definition of the primary duty and the concurrent duties provisions

No Changes Were Made To The Salary Basis Test
Under The FLSA:

• Employees must still be paid a fixed, predetermined salary that is not subject to reduction due to variations in the quality or quantity of work in a workweek

Challenges for Employers

Concurrent Duty Standard Remains Intact:

• Employers are not required to go through what can be a cumbersome duty analysis for groups of affected employees

10% Allowance May Be Difficult To Manage:

• The DOL left unanswered whether employers relying on this 10% allowance for other compensation must “true up” employees upon termination, or risk the loss of the exemption for the “underpaid” weeks in the corresponding quarter
• The use of the 10% allowance requires employers to institute new controls to monitor and ensure that the minimum salary requirements are met each quarter

Creating Policies To Review Salary Levels & Duties:

• Employers should now be mindful of putting a process in place for reviewing salary levels and job duties that can be repeated and re-used every three years, so that employers need not
  “reinvent” the process during each salary reset cycle

Next Steps

Salary Review:

• All employers should review the current salary levels and compensation plans for all exempt employees to determine whether the new salary requirements are met
• Decide if reclassifying employees from overtime exempt to overtime eligible is needed

Employers Should Develop Comprehensive
Guidance To:

• Determine new hourly rates for impacted employees
• Revise or update current timekeeping programs and policies to reflect the changes
• Implement training for both managers and employees addressing the changes

**Article courtesy of Littler®
 This update is designed to provide accurate and informative information and should not be considered legal advice.