Impact of the DOL’S New Overtime Exemption Rules

On May 18, 2016, the U.S. Department of Labor (DOL) issued its Final Rule revising the Fair Labor Standards Act’s (FLSA) overtime regulations. The Final Rule goes into effect on December 1, 2016 and can be found at http://federalregister.gov/a/2016-11754.

General FLSA Overtime Requirements

Generally, the FLSA requires employers to pay employees at 1.5 times their regular rate for the hours they work in excess of 40 hours in a workweek. However, the FLSA exempts certain positions where the employees are paid on a salaried basis – they receive a minimum fixed amount for the week regardless of how much or how little they work – and they perform certain qualifying duties. These exemptions are often referred to as the "white collar" exemptions.

Changes to the "White Collar" Exemption

The Final Rule focuses primarily on the salary basis requirements of the "white collar" exemption:

The minimum salary will be increased from $455 per week to $913 per week or $47,476 annually for a full-year worker;
Employers may use nondiscretionary bonus, incentive, and/or commission payments to satisfy up to 10 percent of the required annual salary under the salary basis test ($91.30 per week); however, this requirement must be met quarterly, which means the employee’s salary must equal at least $821.70 per week and the nondiscretionary bonus, incentive, and/or commission payments must equal at least $1,186.90 per quarter (the employer can issue a one-time make-up payment in the next payroll period immediately following the end of the quarter to fulfill any deficit from that quarter);
The total annual compensation requirement for highly compensated employees subject to a minimal duties test is increased to $134,004; and
The foregoing salary and compensation levels will be automatically updated every three years to maintain the levels at specifically articulated percentiles and to ensure they continue to provide useful and effective tests for exemption.

The Final Rule's Impact

Commentators debate how the Final Rules will impact employers; however, here are two effects upon which most all commentators agree:

Fewer employees will qualify for exempt status (the DOL has estimated that approximately five million employees will need to be "converted" to non-exempt status); and
To preserve some exempt classifications, employers will need to increase employees' salaries to meet the new salary thresholds.

Practical Recommendations

The Final Rule goes into effect on December 1, 2016. Accordingly, employers have less than seven months to ensure they are in compliance with the revised regulations. To prepare for the Final Rule, employers should:

Audit all currently exempt positions to determine whether they will meet the new salary requirements (as well as the unchanged duties tests).
If any of the positions will fail to be exempt under the Final Rule, decide whether changes are needed:
- If a currently exempt position does not typically work more than 40 hours in a workweek, there may be no practical need to adjust the position’s salary. The loss of the exemption – and the corresponding need to pay workers in that position at overtime rates when they work more than 40 hours in a workweek –should be consequential only occasionally, if at all;
- Likewise, if an employer is concerned that some employees will be unhappy losing their status as "salaried," the employer can continue to treat the employees as "salaried non-exempt," which means they can continue to receive their fixed salaries for working up to 40 hours in a workweek, but they also must receive pay at overtime rates when they work more than 40 in a workweek (using their salaries and other compensation to determine their overtime rates); and
- If, however, the position typically works more than 40 hours in a workweek, then the employer must increase the compensation to meet the new salary thresholds and remain exempt.
Clearly communicate any compensation and classification changes to affected employees in advance.
Train employees whose positions were converted from exempt to non-exempt on time-keeping and overtime procedures and policies.
Begin analyzing and adjusting budgets and pay practices and put measures in place to effectuate the salary and compensation level changes that will be automatically enacted every three years pursuant to the Final Rule.
Don’t forget to consider gender-based pay equality requirements and other potential discrimination issues when adjusting salaries.