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Department of Labor Issues Final Overtime Expansion Rule

Publisher: Day Pitney Alert
May 18, 2016
Day Pitney Author(s) John P. McLafferty James M. Leva

After much anticipation, on May 18, the United States Department of Labor (DOL) announced details concerning the final version of its highly controversial expanded overtime exemption rule (Final Rule). The Final Rule, which impacts the "white collar" exemptions under the Fair Labor Standards Act (FLSA) for executive, administrative and professional employees, is expected to be published tomorrow in the Federal Register and will take effect, subject to threatened congressional efforts to derail it, on December 1, 2016. 

A proposed version of the rule released by DOL in June 2015 generated more than 200,000 comments. While the Final Rule is slightly less onerous than DOL's earlier proposal, the burdens on employers are still substantial and will require careful review of job classifications and workforce policies to ensure compliance. 

For an employee to be properly classified as exempt under the FLSA's "white collar" exemptions, the employee must meet what are commonly referred to as the "salary" and "duties" tests. The Final Rule makes no changes to the duties test. Instead, the changes affect only the "salary" test, as follows: 

  • Under current FLSA regulations, which were last updated in 2004, the minimum salary threshold required to qualify for one of the "white collar" exemptions is $455 per week, or $23,660 annually. The Final Rule more than doubles that threshold and raises the minimum salary requirement to $913 per week, or $47,476 annually. This increase, while slightly less than the $50,440 minimum called for under last year's proposed rule, is still a substantial increase from the current threshold. 
  • In a new and potentially welcome addition, employers may count nondiscretionary bonuses, incentive payments, and commissions that are paid at least quarterly to meet up to 10 percent of the minimum salary threshold. The Final Rule also will permit an employer to make "catch up" payments no later than the first pay period after the end of a quarter, if an employee does not earn enough in a given quarter to retain his or her exempt status. Note, however, that any such "catch-up" payment counts only toward the prior quarter's salary amount; it cannot be counted in the quarter in which payment is actually made.
  • The Final Rule increases the salary threshold for qualifying for the "highly compensated employee" (HCE) exemption to $134,004 from the previous $100,000 threshold. This new salary threshold is the equivalent of the 90th percentile of full-time, salaried workers nationally. To qualify under this exemption, employers must pay HCEs at least the standard weekly salary level of $913 on a salary or fee basis, while the remainder of the total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation. The duties test for HCEs, which requires such employees to customarily and regularly perform at least one of the duties contained in the executive, administrative or professional exemptions, remains unchanged.
  • The Final Rule also calls for automatic updates every three years to ensure the salary requirements continue to align with the chosen benchmarks of the 40th percentile of the lowest-wage Census Region (currently the South) for the "white collar" exemptions and the 90th percentile nationally for purposes of the "highly compensated employee exemption." The first automatic update to the salary thresholds is scheduled for January 1, 2020.

Needless to say, the Final Rule will have a substantial impact on many employers. Employers should begin to audit their exempt positions in light of this revised rule to determine which employees may be affected by these changes and to analyze potential risks. Employers have a variety of options to respond to the Final Rule's changes prior to its December 1 effective date, including, among other things, reclassifying employees to be nonexempt, redistributing work to avoid overtime hours, or increasing an employee's salary to align with the new requirements in order to maintain that employee's exempt status. It is also worth noting that employers must still be mindful of state law wage and hour requirements and exemption criteria. Employers should consult with counsel in navigating the precarious web of wage and hour laws.

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