The Employer's Legal Resource: DOL Issues Final Rule on Overtime Exemptions

06.01.16

The long awaited final regulations from the Department of Labor about the minimum salary level for employees to qualify for the white collar overtime exemptions (executive, administrative, professional employees) are finally here. We first told you about the proposed regulations in our July ELR. The notice and comment period following the proposed rule ended on September 4, 2015, and the DOL received public comments from more than 270,000 individuals and organizations. The final rule is generally in line with, but somewhat scales back, what was proposed by the DOL last summer.

Under the final rule, the standard salary level for exempt white collar employees is set at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region, currently the South. This results in a salary level of $913 per week, or $47,476 annually, based on data from the fourth quarter of 2015.

Thus, white collar employees subject to the salary level test earning less than $913 per week will not qualify for the exemption, and therefore will be eligible for overtime when they work more than 40 hours per week. The DOL estimates that, as a result of this increase, 4.2 million employees will no longer fall within the white collar exemption (even if their job duties would otherwise qualify them) and will therefore be overtime-protected.

In addition to the higher threshold, the final rule permits employers to satisfy up to 10 percent of the standard salary requirement with nondiscretionary bonuses, incentive payments, and commissions, provided they are paid at least quarterly or on a more frequent basis.

The DOL also updated the total annual compensation requirement for exempt Highly Compensated Employees (HCEs) equal to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally. The figure is $134,000. The DOL believes this approach will avoid the unintended exemption of large numbers of employees in high-wage areas - such as secretaries in New York City or Los Angeles - who are clearly not performing white collar duties.

The DOL added a provision to the regulations that automatically updates the standard salary level and HCE compensation requirements every three years by maintaining the earnings percentiles set in the final rule "to prevent these thresholds from becoming outdated." The proposed regulation last summer included a yearly automatic update provision, but the DOL ultimately revised that approach, based at least in part on public comments that it would be too difficult for employers to get in compliance with such a frequently moving target. The first update will take effect on January 1, 2020. Based on historical wage growth data, the 2020 update is likely to increase the standard salary level to approximately $984 per week ($51,168 annually) and the HCE requirement is likely to be approximately $147,524.

Like most other laws the DOL enforces, the FLSA is intended to afford broad coverage to employees. The requirement that employers pay a premium rate for all hours worked over 40 in a workweek is grounded in two specific policy objectives: to spread employment (or reduce involuntary unemployment) by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours; and to reduce overwork and its detrimental effect on the health and wellbeing of workers. The DOL's rule update seeks to effectuate these underlying policies and "modernize and simplify the regulations while ensuring that the FLSA's intended overtime protections are fully implemented."

Throughout the FLSA's legislative history, the DOL has noted that the "salary level adopted must exclude the great bulk of nonexempt persons if it is to be effective" - but the existing salary requirement (prior to the new final rule) is below the 2015 poverty threshold for a family of four. According to the DOL, the updates are necessary so that the regulations effectively distinguish between overtime-eligible white collar employees who Congress intended to be protected by the FLSA's minimum wage and overtime provisions and bona fide [white collar] employees whom it intended to exempt. When the definition becomes outdated, employees who Congress intended to protect receive neither the higher salaries and above-average benefits expected for [white collar] employees nor do they receive overtime pay, and employers do not have an efficient means of identifying workers who are, and are not, entitled to the FLSA's protections.

The updated salary level and total annual compensation requirements "thereby making the exemption easier for employers and employees to understand and ensuring that the FLSA's intended overtime protections are fully implemented." The DOL has updated the salary level requirements 7 times since the FLSA was enacted in 1938, most recently in 2004 (which nearly tripled the per week minimum salary level required for exemption up to that point. The DOL's current "modernization of the regulation will provide predictability for employers and employees by replacing infrequent, and thus more drastic, salary level increases with gradual changes occurring at set intervals."

The final rule - including the new salary threshold - becomes effective December 1, 2016. The DOL believes this delayed effective date will allow employers ample time to make any changes that are necessary to comply with the final regulations. The DOL also plans to provide significant outreach and compliance assistance and issue a number of additional guidance documents in connection with the publication of the final rule.

We will continue to write on this in the coming months to address the mechanics of these new regulations.

By Rebecca D. Stanglein, RStanglein@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment litigation and counsels clients regarding everyday employment matters. 

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