The U.S. Department of Labor’s long-anticipated “Final Rule,” issued on May 18, 2016, updates the federal white collar overtime exemptions by raising to $47,476 per year the minimum salary required to qualify as an exempt employee. Yet the Final Rule, which becomes effective December 1, 2016, could have been worse for employers in many ways.

First, the Department previously proposed increasing the overtime threshold to $50,440 per year. In its Final Rule, the Department reduced that anticipated figure by nearly $3,000.

Second, in the Department’s original proposal, the Department sought input as to whether it should make changes to the duties test concerning the white collar exemptions by requiring, for example, salaried employees to spend at least 50% of their time performing exempt duties to qualify for an overtime exemption. As additional good news for employers, the Department’s Final Rule makes no changes to the duties tests.

By way of background, under prior regulations, employees needed to meet certain job duties tests and receive wages of at least $455 per week, or $23,660 annually, on a salaried basis to be exempt from the federal minimum wage and overtime requirements. While the Final Rule leaves untouched the duties tests, it raises that salary level to $913 per week, or $47,476 per year. The Final Rule also raises the threshold for the exemption for “highly compensated” employees to $134,004 from the previous threshold of $100,000. 

But the good news continues: For the first time, the Final Rule allows employers to include non-discretionary bonuses and commissions to satisfy as much as 10% of the required salary amount. In addition, if an employee does not earn enough in a particular quarter to meet the new salary threshold, the Final Rule allows the employer to pay the employee a “catch-up” payment within one pay period following the end of that quarter.

And the final bit of good news is that the Department will not be further increasing the salary threshold for another three years (although at that point, and every three years thereafter, the threshold will increase).

If they have not done so already, employers should review how employees are classified and compensated now in anticipation of the December 1, 2016, effective date to determine which jobs and employees may lose their exempt status. If any employee currently classified as exempt (who otherwise satisfies one or more of the duties tests) is not presently receiving compensation of at least the updated salary level, employers should weigh the following options:  

• If fiscally feasible, increase the employee’s salary to the new level to allow the employee to retain his or her exempt status.

• Reclassify the employee as non-exempt and pay the employee overtime pay at a rate of one and one-half times the employee’s regular rate of pay for all overtime hours worked. (Indeed, employers can use the Department’s rule change as an opportunity to reclassify an employee who presently may be misclassified because the employee’s duties do not qualify him or her for any exemption.)

• Prohibit the employee from working overtime (perhaps by hiring additional employees to perform similar job duties).

• Reduce the employee’s base salary to account for overtime hours worked so that, when factoring in the overtime pay, the employee’s total compensation (regular rate plus overtime rate) going forward is consistent with the employee’s historic base pay. Of course, this approach is best undertaken after consultation with the employee to gain his or her buy-in to the concept.

Naturally, certain of the above options may negatively impact employee morale unless implemented carefully. Messaging is critical, and employers should proceed cautiously and with guidance from Human Resources and employment law counsel. And for jobs and employees whose status changes from exempt to non-exempt, employers should be careful to reinforce existing overtime policies and train the newly classified non-exempt employees regarding such overtime policies, including with respect to timekeeping and refraining from working overtime without preapproval.

This will surely be a time of change for most employers. But as we said, it could be worse, and with careful planning, analysis, and messaging, employers and employees alike can benefit.