By Colleen Flynn and Joan Vecchioli
On May 18, 2016, the Department of Labor (DOL) announced the Final Rule updating the federal regulations on overtime exemptions under the Fair Labor Standards Act (FLSA). The Final Rule becomes effective December 1, 2016. The Final Rule primarily focuses on increasing the minimum salary required for employees to be classified as exempt under the FLSA. The DOL estimates that this will extend the right to overtime pay to approximately 4.2 million workers who are currently classified as exempt and not receiving overtime pay.
The Final Rule specifically:
- Sets the minimum salary level for exempt executive, administrative, professional and computer professional employees (also known as the white collar exemptions) at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South. This results in an increase from $455 to $913 per week or $23,660 to $47,476 annually.
- Sets the total annual compensation requirement for highly compensated employees (HCEs) at the 90th percentile of full-time salaried workers nationally. This results in an increase from $100,000 to $134,004 annually. The total compensation of HCEs still must include a minimum weekly salary. The minimum weekly salary increases from $455 to $913.
- Establishes a mechanism for automatically updating the salary and compensation levels every three years, beginning January 1, 2020, to maintain the levels at the stated percentiles and ensure they continue to provide effective tests for exemption from overtime.
- Amends the salary basis test to allow employers to satisfy up to 10% of the new minimum salary level using non-discretionary bonuses and incentive payments, including commissions. To apply the non-discretionary bonuses and incentive payments toward a portion of the weekly salary (capped at 10% of the minimum required salary), those payments must be made at least quarterly. The new rule also allows an employer to make a catchup 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. Employers may not credit non-discretionary bonuses or incentive payments toward the minimum weekly salary required for exempt HCEs because employers are already permitted to satisfy a portion of the HCEs’ total annual compensation requirement with those payments.
The Final Rule does not make any changes to the duties tests for executive, administrative, professional or computer professional employees.
Employers have until December 1, 2016 to comply with the Final Rule. Over the next six months, employers should analyze whether the employees who are currently classified as exempt under one of the white collar exemptions can remain classified as exempt after December 1, 2016. Depending on the outcome of the analysis, employers have several options for compliance. An employer can raise the guaranteed salary to $913 per workweek for an employee who meets a duties test and the employer will not be required to pay that employee overtime. Alternatively, the employer can continue to pay a salary below $913 per week, but the employee must be paid overtime pay if the employee works more than 40 hours in a workweek and the employer must carefully monitor and record the hours worked. As another option, an employer can elect to reorganize its workplace and reallocate the workloads of its employees to ensure that no employee is working more than 40 hours in workweek. In addition to these examples, there may be other options for employers to explore. Employers should prepare for this inevitability over the next six months, however, as there is no grace period for enforcement. An employer who misclassifies an employee as exempt is potentially liable for all unpaid overtime owed, liquidated (double) damages, and attorneys’ fees and costs.
We recommend that employers conduct internal audits to review their current classifications of employees and evaluate their options to put in place compensation systems that best benefit operations and minimize the financial impact of the Final Rule on their businesses. While there may be potential legislation and litigation to prevent the DOL’s enforcement of its new regulations, employers should begin the process now to ensure compliance by the December 1, 2016 effective date.
Please contact us if we can provide guidance during this evaluative process.
Colleen M. Flynn is a partner in the Clearwater office whose practice focuses on labor and employment law.
Joan M. Vecchioli is a partner in the Clearwater office and is Board Certified in Labor and Employment Law by the Florida Bar. She was named Best Lawyers® 2016 Litigation – Labor and Employment “Lawyer of the Year” for the Clearwater/St. Petersburg metro area.