On May 17, 2016 the United States Department of Labor, after much anticipation, issued its Final Rule updating the Fair Labor Standards Act regulations governing the “white collar exemptions” for executive, administrative, and professional employees. What follows is a summary of the Final Rule along with some comment on how it differs from the proposed regulations published earlier this year.
There are five key points that should interest employers.
- The Minimum Salary Has Increased Substantially.
The salary level required to meet the white collar exemptions has increased from $23,660 per year ($455 per week) to $47,476 ($913 per week). This threshold is slightly lower than what had been proposed in the rules; in July 2015 the Department of Labor had proposed a threshold of $50,440 per year. This salary level was set at the 40th percentile of salary for workers in the lowest income census region, which is currently the south. The salary level was last increased in 2004 at which time it was set at the 20th percentile.
- Automatic Increases Every Three Years.
Beginning in 2020, the Department will update the salary level every three years in order to assure that it remains at the 40th percentile for the lowest wage census region in the country. Historically, such increases required separate regulatory action, with the last increase occurring twelve years ago, and the increase before that taking place twenty-five years prior. The proposed regulations had called for annual increases, but the final regulations have allowed employers more time between adjustments.
- The Duties Tests Were Not Changed.
The proposed regulations and Department of Labor commentary suggested that the duties tests were being considered for update. The final regulations, however, leave the duties tests unchanged which is a significant win for employers. The commentary suggested that the Department was interested in examining whether the “primary duty” must occupy more than 50% of the exempt employees work time. This would have narrowed the availability of exemptions, especially for employees in retail establishments who perform both exempt and non-exempt duties as need be.
- Non-Discretionary Bonuses, Commissions and Incentive Pay.
Employers will now be able to satisfy the new salary level, in part, through applying commissions, non-discretionary bonuses, and other incentive compensation. There is, however, a limit to the use of such compensation with employers being allowed to apply only 10% of the salary in this fashion. Such payments must be made quarterly with employers being allowed to make “catch-up” payments if the employee has not earned sufficient commissions to satisfy the salary level requirement in any particular quarter.
- Highly Compensated Exemption.
The final rule set the highly compensated exemption salary at $134,004 per year. The method used to set this number retains the proposed rule concept of setting the threshold at the 90th percentile of full-time salaried workers on a national basis.
- Effective Date and Suggested Action.
The effective date of the final rule has been set as December 1, 2016. In the interim, employers should consider the alternatives for compliance, including:
(1) Increasing employees’ salaries to at least the new salary level and continuing to treat employees as exempt (assuming they satisfy both the salary basis and duties requirements); (2) Reclassifying employees as non-exempt and paying overtime for hours worked over 40; and/or (3) Reducing employee hours to avoid overtime work.
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Mark Ventola and Jim Reidy are Shareholders at Sheehan Phinney Bass & Green. They are Co-Chair’s of the firm’s Labor, Employment and Employee Benefits Group.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice.
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