Client Bulletin: DOL Issues Final Rule on Overtime Exemption Salary Minimums

By: Gina Del NegroWendy Fischman, and Catherine Guttman-McCabe

On May 18, 2016, the U.S. Department of Labor (DOL) posted on its website (https://www.dol.gov/whd/overtime/final2016/index.htm), the long-awaited Final Rule regarding the new overtime regulations that it proposed last summer.  The Final Rule is effective December 1, 2016, and is estimated to extend overtime pay eligibility to over 4 million workers by significantly increasing the minimum salary and compensation requirements.

Snapshot of the New Rule

  • The minimum salary level for the “white-collar” exemption will increase to $913 per week ($47,476 per year), so employees paid below that level will be eligible for overtime, regardless of their job duties.
  • The salary threshold will increase every three years.
  • Employers must comply by December 1, 2016.

Current Regulatory Requirements

Under the current federal regulations, employers must pay their workers one-and-a-half times their regular rate of pay for hours worked over 40 hours, unless their job meets an exemption from overtime pay.  The most common exemption is the “white-collar” exemption, which covers executive, administrative, and professional employees.

In addition to meeting certain duties tests to establish that the job is indeed an executive, administrative, or professional position, an employer must also currently pay the employee a minimum salary of $455 per week (or $23,660 per year).  Highly-compensated employees, those who are paid at least $100,000 per year (when counting salary, non-discretionary bonuses, incentive payments, and commissions), and still paid $455 each week, are subject to a more streamlined duties test.

The salary level test does not apply to doctors, lawyers, or teachers, and a special salary level test applies to academic administrative personnel.  The new Final Rule continues this approach.

What Does the Final Rule Provide?

The major changes under the Final Rule are:

  • Doubling the minimum salary level to $913 per week ($47,476 per year);
  • Increasing the minimum compensation for highly-compensated employees to $134,004 per year;
  • Automatic salary level increases every three years to reflect the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, to be published in the Federal Register at least 150 days before the effective date;
  • Automatic increases to the highly-compensated employees compensation requirement every three years to reflect the 90th percentile of yearly earnings of full-time salaried workers nationwide, to be published in the Federal Register at least 150 days before the effective date; and
  • Permitting employers to include nondiscretionary bonuses, incentive payments, and commissions (as long as they are paid quarterly or more frequently) in meeting 10% of the new salary level for non-highly-compensated employees.

Next Steps for Employers

In preparation for the December 1 effective date of the regulations, employers must review their “white-collar” exempt employees’ salaries to determine whether these employees still meet the minimum salary requirements for the exemption, and, if not, whether their jobs require them to work more than 40 hours per week.  Now is also a good time to confirm that all exempt employees meet the duties test for their exemption and make any necessary reclassifications during this period of transition.  No action is required for hourly workers or salaried workers who are already paid overtime.

Keep in mind that, in addition to an employee’s weekly salary, employers can now include quarterly bonuses, incentive payments, and commissions to count for up to 10% of the weekly salary minimum for non-highly-compensated employees.  The regulation also allows employers to make quarterly catch-up payments, if the total of an employee’s weekly salary plus bonuses, incentive payments, and commissions does not meet the minimum salary level, as long as the combined catch-up and non-salary compensation only account for 10% of the minimum salary requirement.

If certain employees will no longer meet the minimums, employers must either pay those employees overtime pay for any hours worked over 40 hours per week, realign workloads to limit the need for overtime, or increase their salary or other compensation to ensure that the positions meet the new levels. Employers will need to notify any reclassified employees of their new “non-exempt” status and provide proper tools for employees to track their hours worked. Training for employees and their managers may help ease the transition to non-exempt status.

The Good News

Despite requesting comments on whether to modify the duties tests or the primary duty analysis and whether to add additional examples for certain occupations, the DOL decided not to amend the duties requirements or add new examples.  Recognizing the greater difficulty in implementing changes to the duties test, the DOL has decided that the new salary level, along with automatic updating, will address many of the concerns about potential overuse of the exempt classifications.

We are available to answer questions, assist in reviewing the exempt status of your employees, and advise generally regarding overtime obligations.

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This Bulletin is not intended as legal advice.  Readers should seek professional legal counseling before acting on the information it contains.