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Change is on the Horizon for the Department of Labor's Final FLSA Overtime Exemption Rule. Are You Prepared?

On May 18, 2016, the US Department of Labor (DOL) announced the long-awaited revisions to the federal Fair Labor Standards Act’s (FLSA) overtime regulations.

What initiated the regulatory changes?

In March 2014, President Obama issued a Presidential Memorandum directing the Secretary of Labor to propose revisions to the FLSA regulations that would modernize and streamline the Part 541 regulations. The DOL published its notice of proposed rulemaking (NPRM) on July 6, 2015, as the agency’s response to that directive.

After a comment period that ended September 4, 2015, and during which the DOL received more than 270,000 comments, the DOL reviewed the comments and issued its final rule, which was published in the Federal Register on May 23, 2016 (81 Fed. Reg. 32,391). The final rule is effective December 1, 2016.

However, the DOL has long been clear about the need to update the FLSA regulations to better reflect the modern workplace and to increase the current salary level from the 2004 rulemaking, when the agency last revised the regulations and increased the salary amount governing the white collar exemptions under the FLSA. While some of the rationale in the preamble to the 2004 revisions also appears in the preamble to the 2016 final rule, the DOL is very clear in its 2016 final rule that its primary goal is to significantly increase the salary level. A major reason for the 2016 rulemaking is purportedly to correct the 2004 regulations, which the current DOL says paired the less robust duties portion of the short test with the lower salary threshold of the long test, combining the two into a single standard.

What exemptions are affected?

The DOL’s final rule increases the minimum salary level for these exemptions:

(29 C.F.R. §§ 541.100, 541.200, 541.300, and 541.600.)

In addition, the final rule increases the minimum annual compensation and the minimum weekly salary threshold for highly compensated employees (HCEs).

The new rule also increases the special minimum salary levels for:

  • Employees in American Samoa (except those employed by the federal government).
  • Employees in the motion picture industry.

What is the new minimum salary threshold?

The final rule dramatically increases the minimum salary required for the white collar exemptions from $455 to $913 per week, effective December 1, 2016. The benchmark for the final salary amount is the 40th percentile of weekly earnings of full-time non-hourly (or salaried) workers in the lowest-wage Census Region. Of the four Census Regions, currently the South has the lowest weekly wage at the 40th percentile. The new minimum salary of $913 per week translates to:

  • $1,826 biweekly.
  • $1,978 semimonthly.
  • $3,956 monthly.
  • $47,476 annually.

The total annual compensation requirement for an HCE, as defined in Section 541.601, increases from $100,000 to $134,004, effective December 1, 2016. Of the $134,004, the HCE must receive at least $913 per week paid on a salary basis. The benchmark for the total annual compensation of an HCE is the annualized earnings amount for the 90th percentile of earnings of full-time non-hourly (or salaried) workers nationally.

The final rule also increases the special minimum salary level for employees in American Samoa (except those employed by the federal government) to $767 per week, and the special base rate for employees in the motion picture industry to $1,397 per week.

The new rule also includes a mechanism to increase the minimum salary level and total annual compensation. As a concession to job creators, the increase will occur every 3 years beginning January 1, 2020, instead of annually as originally proposed. Looking ahead, the DOL estimates that the impact of this automatic-increase provision will be to increase the salary threshold to approximately $984 per week, or $51,158 per year, and to increase the total annual compensation requirement for HCEs to approximately $147,524 by January 1, 2020. This provision is a new Section 541.607.

What does “salary” include for purposes of satisfying the minimum salary threshold?

In its NPRM, the DOL proposed a provision to allow employers to apply non-discretionary payments to satisfy up to 10% of the new weekly salary requirement. The final rule includes a revised version of that proposal:

  • The new rule includes commissions as a type of non-discretionary payment that can be used to satisfy 10% of the final salary amount of $913 per week.
  • The DOL allows non-discretionary bonuses, commissions, or other incentive payments to be paid quarterly or on a more frequent basis.
  • The new rule allows employers to make a catch-up payment (which must be made by the next pay period after the end of a quarter) when the sum of the employee’s actual weekly salary plus the non-discretionary bonus, commission, or other incentive payments does not equal the required minimum salary.

We recommend that employers who provide non-discretionary payments to exempt employees earning less than $913 per week evaluate this option to meet the new minimum salary threshold.

What does this mean for currently exempt employees who do not earn at least $3,956 per month?

For employees currently classified as exempt who do not meet the new minimum salary, employers need to analyze whether to increase employee compensation to maintain their exempt status or reclassify them as non-exempt. Employers must address a number of issues for those employees who will be reclassified, including:

  • Whether to pay them on an hourly basis or treat them as salaried non-exempt.
  • Whether they work overtime hours and, if so, how to adjust their compensation to account for the overtime pay.
  • Whether they will be subject to different fringe benefit plans as non-exempt employees and, if so, whether to make changes in benefit plans.
  • Whether to rightsize or manage the workloads of affected employees.
  • How and what messages it wants to communicate to affected employees and managers to facilitate a smooth transition.
  • What training and education to provide affected employees on various policies, such as timekeeping and overtime.
  • How to address the after-hour use of email, as well as other technology or electronic communications devices, by affected employees.

Do the new regulations change anything other than the minimum salary threshold?

No. After review of all the comments, the DOL decided not to make any changes to the duties tests for the executive, administrative, professional, and computer professional employee exemptions. It also decided against including any additional specific examples of job classifications under the Part 541 regulations. The duties tests and amount of non-exempt work that exempt employees perform, however, is on the DOL’s radar for future rulemaking.

What happens next?

The DOL established December 1, 2016, as the new rule’s effective date. Employers must be in compliance by that date. At this time, there is no provision for delayed enforcement or special rules, with the exception of the DOL’s delay, until March 17, 2019, of enforcement of the new rule to Medicaid-funded service providers to individuals with disabilities in residential homes with 15 or fewer beds.

While there may be Congressional actions and possible litigation to thwart the DOL’s enforcement of its new regulations, employers should proceed to implement the new salary level and total annual compensation requirements by the December 1, 2016 effective date, or at least until there is clarity about whether such actions may have merit or the DOL provides additional time to comply.

Is your business ready to comply with these new rules? Rosenthal Law Group can help. Call us today to learn more about how our Florida business litigation attorneys can ensure that your business is in complete compliance.