Effective December 1, 2016, the minimum salary threshold to qualify as exempt from overtime under the executive, administrative, and professional exemption of the Fair Labor Standards Act (“FLSA”), often referred to as the “White Collar” exemption, will more than double, increasing from $23,600.00 to $47,476.00 annually and from $455.00 to $913.00 weekly. The increased threshold is based on the 40th percentile of full-time salaried workers in the lowest-wage census region (currently the South).
The more than twofold increase under the final rule issued by the U.S. Department of Labor on May 18th is expected to result in 4.2 million currently exempt employees becoming eligible for overtime pay, unless their employers intervene by raising affected workers’ salaries. Although the expected impact is significant, the final rule doesn’t increase the threshold for executive, administrative, and professional exemptions as high as earlier proposed.
In a gift to employers, for the first time employers may use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the weekly salary threshold, provided such payments are made at least quarterly. If at the end of a quarter, an employee hasn’t received bonuses or incentives such as commissions equal to 10% of the threshold level for 13 weeks, the employer is permitted to make a payment within one pay period after the end of the quarter to make up the deficit. Employers should be sure not to exceed the 10% maximum allowance, or misclassification claims may result. Employers must also ensure that only nondiscretionary bonuses, rather than discretionary bonuses, are included in the 10% calculation.
As a result of the increased threshold for exempt status, before December 1st, employers will need to identify affected employees, assess whether their current salaries meet the new threshold, and whether to increase pay for those that do not meet the requirement or otherwise convert these employees to non-exempt status, making them eligible for overtime pay. In so doing, employers should consider the hours worked by each affected employee, and whether reclassification would result in additional costs compared to raising the salary to meet the threshold. If reclassified, employees should be informed of timekeeping and meal and rest break requirements, and any other policies relevant to the employer’s other non-exempt employees. The delayed effective date gives employers time to consider methods of controlling overtime, and to review policies and procedures to ensure compliance with overtime laws. It would also be prudent to take the opportunity to review all exempt employee classifications to eliminate possible costly misclassifications. Employers should keep in mind that any salary changes needed to maintain exempt status must be made for the workweek that includes December 1, 2016, which is a Thursday.
Although expectations were that the final rule may change the existing job duty requirements to qualify for the exemption, no change was made to any of the existing job duty requirements for exempt eligibility. The rules remain that to qualify for the exemption, an employee must be paid on a salaried basis, be paid at least the minimum required weekly salary, scheduled to increase December 1st, and perform job duties so that the employee’s primary duty is to perform exempt work.
Although the new rule did not raise the salary threshold for non-highly compensated exempt workers as high as had been proposed, the rule does increase the salary level required to qualify for the highly compensated employee exemption even higher than was proposed, resulting in a 26% increase, from $100,000.00 to $134,000.00, which is the 90th percentile of earnings of all full-time salaried workers in the U.S. Employees classified as exempt under the highly compensated exemption must perform office or non-manual work, and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee, and these rules remain unchanged.
Under the final rule the minimum salary threshold will be adjusted automatically every three years, starting on January 1, 2020, to maintain the non-highly compensated exempt threshold at the 40th percentile of full-time salaried workers in the lowest-wage U.S. census region, and for highly compensated exempt employees, to maintain the threshold at the 90% percentile of earnings of U.S. full-time salaried workers, thereby keeping pace with economic conditions. Given the automatic adjustments, to maintain compliance, employers should plan to reassess employee classifications every three years, at a minimum.
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