On December 1, 2016, revised regulations addressing the “white collar” overtime exemption under the Fair Labor Standards Act (FLSA) will go into effect. The new regulations double the minimum salary an employer has to pay to an employee to designate him or her as “exempt” from overtime pay. Although the U.S. House of Representatives just voted to delay implementation of the Final Rule revising the regulations by six months, the House bill is unlikely to gain much traction and employers should be preparing to implement any necessary changes to employee compensation by December 1.
Right now, there are three tests that a white collar employee generally must meet in order to qualify for an exemption to the FLSA’s overtime provisions:
- the “salary basis test” (be paid on a salaried basis);
- the “salary level test” (be paid at least a specified weekly salary, currently $455 per week); and
- the “duties test” (primarily perform executive, administrative, or professional duties, as defined by Department of Labor regulations).
The revised regulations taking effect on December 1, 2016, affect the salary level test, but they do not affect the duties test or the salary basis test. An employee must still be paid on a fixed, predetermined salary basis that is not subject to deduction based on time worked in a workweek or the work performed in order to qualify for an overtime exemption.
Key changes taking effect in December include:
- Minimum salary level requirements increase: The current minimum salary level for a white collar overtime exemption is $455 per week, or $23,660 per year. The new regulations significantly increase the minimum salary to $913 per week, or $47,476 per year.
- Nondiscretionary bonuses and commissions count: The new regulations permit employers to use certain types of other compensation to satisfy up to 10% of the new minimum salary requirements. Other compensation may include nondiscretionary bonuses, incentive payments and commissions and must be paid at least quarterly. The regulations impose additional requirements on the minimum salary that must be paid per workweek, and provide for a one-time shortfall payment if, at the end of a quarter, the salary plus 10% additional compensation does not meet the $913 per workweek minimum.
- The highly compensated employee minimum salary increases: Highly compensated employees can also be exempt from the FLSA’s overtime provisions. Currently, the minimum salary level needed to qualify as a highly compensated employee is $100,000 per year. The new regulations increase the minimum to $134,004 per year. Bonuses and other incentive compensation can be used to satisfy the highly compensated employee test.
- Automatic minimum salary increases every three years: The revised regulations automatically increase the minimum salary level every three years. The first update will take effect on January 1, 2020, with future increases taking effect on January 1 every three years thereafter.
To prepare for these changes, employers should:
- Review current salaries for all exempt employees. Employers should determine whether their exempt employees meet the revised salary requirements. If they do not meet these requirements, employers must determine whether to increase salaries for these employees to meet the threshold salary requirement or reclassify employees as nonexempt.
- Determine new hourly rates for any employees reclassified as nonexempt. If exempt employees do not meet the new minimum salary requirements and employers do not wish to increase their salaries, employers will need to reclassify these employees as nonexempt. Employers should track these employees’ hours in order to pay them for any overtime worked.
- Revise, notify, and train. Revise policies as needed, notify affected employees of any reclassification or change in salary, and provide any needed training to managers and employees to address these changes.
The FLSA regulations are complex and businesses of all sizes often inadvertently run afoul of wage and hour laws. Employers are highly encouraged to seek counsel from employment attorneys well-versed in wage and hour law to ensure compliance with the regulations.