DOL's final rule increases minimum salary for overtime exemptions

The Fair Labor Standards Act (FLSA) generally requires employers to pay employees at least the federal minimum wage and overtime compensation for all hours worked over 40 in a workweek. Overtime pay must be at least 1½ times an employee’s regular rate of pay. However, some employees are exempt from the FLSA’s overtime requirement. The most common exemptions apply to executive, administrative, professional, highly compensated, outside sales, and computer employees.

Tests have been promulgated for each of the exemptions. An employee qualifies for an exemption only if she is paid a minimum amount on a salaried basis, regardless of whether she performs duties that satisfy one of the exemption tests. In the past, some salaried employees were exempt from the overtime requirements as long as they were guaranteed a salary of at least $455 per week ($23,600 per year).

In 2015, the U.S. Department of Labor (DOL) proposed changes to the regulations stating which employees are exempt from the FLSA’s overtime rules. Specifically, the DOL proposed increasing the minimum salary an employee must be paid to qualify for an exemption. The DOL recently promulgated a final rule that will change which employees are exempt from the FLSA’s overtime requirement. This article discusses the rule and what employers must do to ensure compliance.

New rule

On May 18, 2016, the DOL issued a new rule increasing the salary threshold for exempt employees to $47,476 per year ($913 per week). The new rule will take effect on December 1, 2016. The change will significantly increase the number of workers eligible for overtime pay under the FLSA. The rule allows employers to use nondiscretionary bonuses and other incentive payments to count for as much as 10 percent of the new salary threshold. It is estimated that approximately 4.2 million more employees will be entitled to overtime pay nationwide because of the change.

In addition, the salary threshold will be automatically updated every three years, beginning in 2020. The automatic updates are designed to ensure that the threshold remains at the 40th percentile of full-time salaried employees in the region of the country with the lowest average income based on the U.S. Census. Exempt employees must also satisfy one of the duties tests for the various exemptions. The new rule did not make any changes to the duties tests.

The DOL also increased the minimum salary an employee must receive to fall under the highly compensated employee exemption. Currently, an employee must be paid total annual compensation of at least $100,000. The new rule raises the threshold to $134,004, which is the 90th percentile of earnings for full-time salaried employees.

Employers need to take action

Employers must evaluate whether employees who are currently exempt from the overtime requirements should be reclassified as nonexempt (and be eligible for overtime) or whether other actions should be taken. Employers have three options to comply with the DOL’s rule:

1. Employers could reclassify workers who do not satisfy the new salary threshold as hourly employees subject to the FLSA’s overtime requirements. As a result, the employees would be entitled to at least minimum wage plus overtime compensation at 1½ times their regular rate of pay for all hours worked over 40 in a workweek.
   
2. Employers may raise workers’ salaries to satisfy the new threshold and retain their exempt status. This may be a good option for workers who are currently paid just less than $47,476.

3. Employers may reclassify workers as salaried nonexempt. Workers would receive a base salary plus overtime compensation for all hours worked in excess of 40 during a workweek. Although workers would be paid a base salary, the employer would still be required to keep accurate records of all hours worked during each workweek in order to properly
   calculate and pay overtime.

Reclassification must be completed by December 1, when the rule takes effect. Employers should develop plans now to ensure compliance with the new rule. Effective and clear communication will be critical because
employees may perceive reclassification as a demotion. On the bright side, the DOL’s new rule may provide an excuse to reclassify employees who were previously classified incorrectly.