Following President Obama’s 2014 mandate to revise its overtime regulations, the U.S. Department of Labor published its final rule (the “Rule”) on May 18, 2016. The Rule’s most significant change is increasing the minimum salary requirement for the Fair Labor Standards Act’s executive, administrative, and professional exemptions (the “white collar exemptions”) to $913 per week or $47,476 per year. This almost doubles the existing federal threshold of $455 per week or $23,660 per year. The Rule takes effect on December 1, 2016.
Here is a summary of the Rule’s key provisions:
- Raises the minimum salary threshold for the executive, administrative, and professional exemptions to $913 per week or $47,476 annually.
- Raises the total minimum compensation employees must receive in order to fall under the federal highly compensated employee exemption from $100,000 per year to $134,004 per year.
- Allows employers to count nondiscretionary bonuses and other incentive payments (including commissions) for up to 10% of the salary threshold.
- Increases the salary threshold automatically every three years beginning January 1, 2020.
Importantly, the Rule does not (1) change the duties test for white collar exemptions or (2) make any changes to the outside sales or computer professional exemptions.
Although the Rule is likely to face political and legal challenges, employers must be prepared to implement the Rule by December 1. Employers will need to reevaluate the status of employees who are (1) classified as exempt under the white collar exemptions, and (2) earn less than $913 per week or $47,476 per year. Employers must either increase the salaries of these employees to meet the threshold, or reclassify them as nonexempt and pay overtime wages (with or without salary adjustments). This is also a good time to conduct an analysis of exempt employees’ job duties to ensure they meet the duties test for the white collar exemptions.
Because of the sensitive nature of this process and the risk that internal communications will be discoverable in litigation challenging the exempt status of employees, employers should seek advice from employment counsel regarding the best ways to address financial concerns while minimizing the risk of increased wage and hour litigation.