On May 18, 2016, President Obama and the United States Secretary of Labor Thomas Perez announced the publication of the Department of Labor's (DOL) final rule updating overtime regulations. The new rule increases the minimum salary level basis for exempt white-collar workers from $23,660 ($455 per week) to $47,476 ($913 per week). Beginning December 1, salaried employees must make at least $913 per week to meet the salary level test under the white-collar exemptions. This rule will increase overtime eligibility under the Fair Labor Standards Act (FLSA) for millions of workers throughout the United States.
Here's what employers should know
The final rule applies to the following white-collar exemptions: executive, administrative, professional, and computer:
- The salary threshold for white-collar employees more than doubles from $455 per week to $913.
- The "duties test" for white-collar employees did not change.
- The salary threshold for highly compensated employees increased from $100,000 per year to $134,004. They must also receive at least $913 per week.
- Employers can use non-discretionary bonuses, such as commissions and other incentive plans tied to productivity and profitability, to satisfy up to 10% of the increased salary basis test. These non-discretionary bonuses must be paid on at least a quarterly basis -- yearly bonuses do not count toward the salary basis threshold. Fringe benefits, such as health insurance and retirement contributions, are not included in this 10%.
- The salary threshold will increase every three years, with the first increase occurring on January 1, 2020.
Classifications not subject to the new salary standard
- Outside sales employees (because the salary level test for white-collar employees does not apply to them)
- Doctors who are currently practicing medicine
- Medical residents and interns
- Lawyers who are currently practicing law
- Employees who are covered by the Motor Carrier exemption
- Any employee who is actively engaged in management of the employer and owns at least a bona fide 20% equity interest in the company
Employers should identify the employees classified under the executive exemption, administrative exemption, professional exemption, and computer exemption. Once the exempt employees are identified, employers should then determine which of these employees have a current salary under the new threshold of $47,476 per year ($913 per week). Employers have a number of options to comply with the new rule:
- Convert the employee to hourly, non-exempt - In this situation, the employer should keep track of the hours each employee works during the week. If an employee works more than 40 hours in a week, the employer should pay the employee time-and-a-half for all hours over 40 per week.
- Raise the base pay of the employee to $47,476 or above - If an employee's salary is already close to the new salary basis minimum of $47,476, the safest solution is to simply raise the employee's salary to $47,476 ($913 per week).
- Use a fluctuating workweek method - In states that allow a fluctuating workweek method, the employer can pay the employee a set salary per week. The fluctuating workweek method permits employers to pay non-exempt employees a set salary, as long as the working hours fluctuate from week-to-week. As an example, whether the employee works 25 hours or 40 hours in a week, the employer must pay the employee the entire set salary. For hours worked over 40, the employer pays the employee half-time as opposed to time-and-a-half. However, employers should make it clear, in writing, that the employee's salary covers all non-overtime hours worked in a week. Employers should also make sure the fixed salary covers the state and federal minimum wages.
- Lower the base hourly rate - If the employer moves an employee to non-exempt, it can then recalculate the base hourly rate so the employee makes the same amount and works the same amount of hours. As an example, if the employee made $28,600 per year ($550 per week) and worked 50 hours per week, the employer can begin paying the employee a new non-exempt hourly rate of $10 per hour so the yearly amount stays the same:
- 40 hours x $10 per hour = $400 per week
- 10 hours x $15 per hour overtime - $150 per week overtime
- $400 + $150 = $550 per week ($28,600 per year)
- Limit the number of hours the employee works - If an employee does not meet the salary basis test, the employer can move that person to non-exempt, but limit the number of hours the employee can work to 40 hours or less in a week. If the employee does work more than 40 hours in violation of the new "40-hours-or-less" rule, the employer can discipline the employee for violating the rule, but the employer must still pay the overtime.
The FLSA is an often-litigated law between employees and employers. The new rule will undoubtedly open up a new avenue for litigation. Employers should immediately begin an internal audit of their white-collar exempt employees and highly compensated employees. There are a number of solutions to comply with the new rule, but employers should carefully review their business model and determine which option best fits their company.