If you read most any national news feed this week you are likely to come across the federal government’s unveiling of the U.S. Department of Labor’s final overtime rule (the Final Rule), which approximately doubles the salary basis test for employees to be eligible for the overtime exemption under the Fair Labor Standards Act (FLSA). The Final Rule, which will become effective on December 1, 2016, will mean big changes for the way many employers structure personnel and compensation. It is not too late, and certainly not too soon, for employers to start preparing for the increased salary test to take effect.

White Collar Exemptions

Currently, the compensation required to be eligible for the “white collar” (executive, administrative and professional) exemptions is $23,660 per year, or $455 per week. If employees earn this amount and the applicable duties test is also satisfied, they can be treated as exempt from the minimum wage and overtime pay protections of the FLSA. Under the Final Rule, employees will not be eligible for the white collar exemption unless they earn at least $47,476 per year, or $913 per week.  According to the DOL, this amount correlates with the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region (currently the South). The Final Rule permits employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the salary level. The Final Rule provides for automatic adjustment every three years of the compensation required for the white collar exemption, to maintain the standard salary level at the 40th percentile of full-time salaried workers in the lowest-wage census region.

The Final Rule does not change any of the existing job duty requirements to qualify for the exemption.

Highly Compensated Employees Exemption

The Final Rule increases the compensation required to meet the highly compensated employee exemption to $134,004 per year, which correlates, according to the DOL, with the 90th percentile of full-time salaried workers nationally. This is increased from $100,000 under the current rule.  To meet the exemption, employees also must meet a minimal duties test and make at least the white collar exemption amount each pay period ($913 per week under the Final Rule), excluding bonus and incentives. The Final Rule provides for automatic adjustment every three years of the compensation required for the highly compensated employee exemption, to maintain the total annual compensation level at the 90th percentile of full-time salaried workers nationally.

Comparison with Proposed Rule

The Final Rule underwent changes since the DOL first announced its proposed rule last year. Under the proposed rule, the salary for the white collar exemption was $970 per week (Final Rule: $913). The salary for the highly compensated employee exemption would have been $122,148 under the proposed rule (Final Rule: $134,004). Both would have been subject to automatic adjustments annually, as opposed to every three years per the Final Rule.

Organizational Changes Inevitable

Most every employer will be affected in some way by implementation of the Final Rule. Many factors will play a part in how employers decide to address the new salary requirement. The DOL offers the following strategies that employers can consider for each affected employee newly entitled to overtime pay:

  • increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
  • pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked;
  • reduce or eliminate overtime hours;
  • reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
  • use some combination of these responses.

However, employers may find it necessary to consider other options than those suggested by the DOL, and use previously untapped resources based on circumstance or necessity. Some may consider heavier reliance on a part time workforce to cover work previously done by exempt employees who may no longer be regularly working more than 40 hours per week, job sharing amongst two previously exempt workers, realigning job functions to better align exempt duties with exempt salaries, and other approaches.

The salaries required by the Final Rule will take effect December 1, 2016. Automatic adjustments to take effect every three years under the Final Rule will commence January 1, 2020.  A fact sheet published by the Wage and Hour Division of the Department of Labor can be found here: DOL Final Rule or www.wagehour.dol.gov

For more information about how this rule may affect your organization, please contact any member of Schiff Hardin’s Labor and Employment Group.