More than two years ago, President Obama directed the Department of Labor to conduct a review to update the minimum salary an employer must pay a “white collar worker” it seeks to exempt from overtime. On May 18, 2016, the DOL announced an increase in the salary level to $913 per week ($47,476 for a full-year worker). The Rule goes into effect on December 1, 2016.
Why the change?
The DOL had not adjusted the salary level since 2004. The Obama administration determined that the prior salary level ($455/week, or $23,660/year) was outdated and no longer did its job of helping to separate those who should and shouldn’t be entitled to overtime.
When is an employer required to pay overtime?
The Fair Labor Standards Act requires employers to pay most employees time-and-a-half for any time worked in excess of 40 hours per week (“overtime”), unless they fall under specific exemptions. While there are many exemptions to the overtime requirements under the FLSA, the new regulations focus on the white collar exemptions.
What is a white collar worker?
The term “white collar worker” is a term of art used to describe workers who are employed in a bona fide executive, administrative, or professional capacity, as the Department of Labor describes those terms.
These categories of employees are exempted from overtime requirements if they satisfy the following three tests:
(1) Salary Basis Test: the employee is paid a predetermined and fixed salary that is not affected by varying quality or quantity of work performed;
(2) Salary Level Test: the salary amount meets a minimum specified amount; and
(3) Duties Test: the employee’s job duties primarily involve executive, administrative, or professional duties as defined by the regulations.Note, however, that certain white collar employees at higher education institutions are subject to a different salary level test, and might not be affected by new salary level requirement.
What does the Final Rule provide?
Although employers must still follow the three-prong test to determine whether an employee is exempt from overtime pay, the Final Rule updates the salary level required for exemption and simplifies the identification of overtime-eligible employees in two ways:
(1) Salary Level. Raises the annual salary minimum from $23,660 annually to $47,476 for executive, administrative, or professional employees. As of December 1, 2016, employees who earn less than this new salary requirement will no longer be exempt from overtime compensation when they work more than 40 hours per week.
(2) Automatic Adjustment. Will update the salary and compensation levels every three years to match the 40th percentile of earnings in the lowest-wage Census region. Currently, that region is the Southeast.
Other key takeaways:
(1) Highly Compensated Employees (“HCE”). The FLSA also provides an overtime exemption to highly compensated employees whose primary duties include performing office or non-manual work and who customarily and regularly perform one of the exempt duties of an executive, administrative, or professional (“EAP”) employee. The total annual compensation requirement for the HCE exemption will rise from $100,000 to $134,004. This compensation level is based on the 90 percentile of earnings for full-time salaried workers nationally. The threshold compensation requirement will be automatically updated every three years to continue to correspond to the 90th percentile.
(2) Use of Nondiscretionary Bonuses and Incentive Payments. Employers will be able to apply up to 10% of a worker’s nondiscretionary bonuses and incentive payments (including commissions) to satisfy the standard salary level required for exemption. This provision does not apply to HCEs. (3) Duties Tests. The Final Rule will not change the existing duty requirements for either the standard or HCE duties test.
Recommended next steps:
The Final Rule becomes effective on December 1, 2016, which allows employers a little over six months to make the necessary changes to comply with the new requirements. Employers should promptly review their compensation policies and handbooks to comply with the new regulations. There are several different options for complying with the new regulations, and Kurker Paget would be happy to assist in bringing your workplace into compliance.