Department of Labor Final Overtime Rule

The United States Department of Labor (“the DOL”) has finally issued the long-awaited rules dramatically increasing the minimum salary level for the overtime-exempt classifications under the Fair Labor Standards Act (“the FLSA”). The new rules also incorporate mechanisms to adjust this salary level in the future. The effect of future adjustments will require an employer to pay wage increases unrelated to the employer’s financial condition or employee performance. The new rules will have the greatest impact on those employees currently classified as exempt but who will not meet the new minimum salary threshold. These rules go into effect December 1, 2016, a date later than DOL originally communicated, which gives employers an opportunity to conduct a self-analysis to prepare for these changes.

In 2014, President Obama directed the DOL to update and modernize regulations under the Fair Labor Standards Act governing overtime exemptions for “white collar” employees (i.e., executive, administrative and professional employees). On July 6, 2015, the DOL published a notice of proposed rule making to which it received more than 270,000 comments representing differing viewpoints. On May 18, 2016, the DOL issued the final rule updating the regulations. Under the final rule, the annual salary level for these exemptions will more than double from $23,660 ($455 per week) to $47,476 ($913 per week) beginning on December 1, 2016. (The increase will equal the salary level of the 40th percentile of weekly earnings for full-time salaried workers in the South, which is currently the lowest-wage Census region). These salary levels were last updated in 2004, and the DOL has stated that this new rule will “automatically extend” overtime to an estimated 4.2 million employees who are currently classified as exempt. The increase is less than that originally proposed by the DOL ($50,440 per year or $970 per week).

The DOL also increased the annual compensation level applicable to the overtime exemption for a highly compensated employees (“HCE”) from $100,000 to $134,004, which equals the 90th percentile of full-time salaried workers nationally. To qualify for the HCE exemption, an employee need not meet all of the requirements of one of the white collar exemptions, provided that one of his or her primary duties are those of an executive, administrative, or professional employee.

Beginning in 2020, the DOL will – for the first time – make automatic increases to the salary levels, without the need for rulemaking. These automatic increases will raise the salary level to the 40th percentile of full-time salaried workers in the lowest-wage Census region. The HCE compensation levels will automatically increase to the 90th percentile of full-time salaried workers nationally. Beginning in August 2019, the DOL will post new salary levels 150 days in advance of their effective date. These automatic increases will require employers to provide raises to employees (whether they intended to do so or not), and plan in advance to account for increased wage costs and compliance with budgets.

In addition, unlike the prior regulations, under the new rule employers will be able to use commissions, nondiscretionary bonuses, and incentive payments (e.g., those tied to productivity and profitability) to satisfy the salary level requirements. But, for purposes of meeting the exempt salary threshold, only 10% of an employee’s salary can be paid in this form of incentive pay, and such payments must be made on at least a quarterly basis (although employers may make a “catch up” payment).

To comply with these new requirements, employers will need to evaluate their currently exempt “white collar” employees who earn below the new threshold and make what may be difficult decisions to ensure compliance with DOL regulations. For example, employers will need to determine whether to increase wages for these employees or reclassify such employees as non-exempt. And, to the extent employers choose to reclassify, they will need to (1) track employee time (which may involve implementing new policies and systems); (2) address potential additional wage costs (e.g., for compensable travel time, and the inclusion of bonus payments in an employee’s regular rate of pay to calculate overtime); (3) determine the best way to communicate reclassification to their employees and address the potential impact on employee morale, (3) consider whether such employees are performing after-hours work (e.g., answering calls, responding to work-related texts and emails, performing work remotely, etc.); (4) train managers to ensure employee time is tracked correctly and employees are paid properly; (5) consider reducing employee benefits to offset wage costs; and (6) consider other pay structures such as a fluctuating work week method of payment. Employers may also decide to limit overtime to manage costs, hire part-time workers to offset overtime, and/or outsource certain work.

The final rule does not include any changes to the DOL’s job-description regulations, which are used to determine whether an employee qualifies for one of the white collar overtime exemptions apart from the minimum compensation requirement.

The DOL, Wage and Hour Division has published a Fact Sheet containing information regarding the changed regulations.

Gibbons Employment & Labor Law Department attorneys regularly counsel employers concerning wage and hour compliance matters.