New Minimum Salary Rule Holds Surprises for Employers – and They're Not All Bad
After more than two years of publicity and tremendous speculation surrounding what the new overtime regulations of the Fair Labor Standards Act ("FLSA") would look like after President Obama directed the Secretary of Labor to "modernize and streamline" them, the final version of the rule is finally here – and now the work really begins for employers. By now, we’re all familiar with the reasons behind the changes. So, let’s get to the nitty gritty of the actual changes to the overtime rule and what they mean for you.
The FLSA sets minimum wage and overtime requirements for most workers unless the employee is exempt from minimum wage and/or overtime under one or more of the exemptions set forth in the FLSA. More specifically, these rules do not apply to some "white collar" workers whose salaries and duties exempt them from the overtime pay requirement under the executive, administrative, professional, outsides sales, and computer exemptions. These are the workers who are potentially impacted by the final rule, which updates the regulations for determining whether these white collar employees are exempt from overtime. And, this is no small number of employees – the DOL estimates there are 4.2 million workers who will be affected by the extension of overtime pay eligibility by raising the minimum salary.
The final rule includes the following changes:
Minimum salary. As expected, the final rule significantly raises the salary level.
Standard salary. The minimum salary will be raised from $455 per week to $913 per week (or from $23,660 to $47,476 annually). The DOL estimates that 35 percent of full-time salaried workers will now be entitled to overtime, based solely on salary levels. This is not as high as anticipated or as proposed originally by the DOL. Under the proposed rule, the minimum would have been based on the 40th percentile of full-time salaried workers nationally, but the final rule minimum salary is based on the 40th percentile of full-time salaried workers in the lowest census region (the South). This kept the minimum salary a little lower than anticipated.
Highly compensated employees (HCE). The total annual compensation to meet this exemption will be raised from $100,000 to $134,004 a year.
Automatic updates. The final rule provides the minimum salary and HCE threshold will automatically update every three years (beginning on January 1, 2020) based on wage growth over time. The benefit for employers is that you can better anticipate when the salary updates will happen and how they will be calculated, so you should be in a better position to plan for the increase. (We’ve already put a note on our calendars that the DOL will post new salary levels 150 days in advance of their effective date, beginning August 1, 2019.)
Bonuses, incentive payments, and commissions. The final rule allows up to 10 percent of the salary threshold for non-HCE employees to be met by non-discretionary bonuses, incentive pay, or commissions, as long as these payments are made at least quarterly. This is a new provision, so if you are considering using these types of payments to meet the salary threshold going forward, you should consult with your employment counsel to ensure you do so correctly.
Additionally, despite questions posed by the DOL in the proposed rule and lots of gossip, the final rule will not make any changes to the "duties tests" used to determine whether white collar salaried employees earning at least the minimum salary are eligible for overtime pay.
The new overtime rule and these changes will not go into effect until December 1, 2016. This is an improvement over the estimated date of July 2016 and will afford employers more time to prepare to be in compliance by the effective date.
For those with white collar workers earning more than $455 a week ($23,660 a year) but less than $913 a week ($47,476 a year), you have to make a decision about how to handle their classification under the new regulations before December 1, 2016. You do have some options, such as: (1) increasing the employee’s salary to at least the new minimum salary (assuming the employee meets the duties test), (2) paying the employee the overtime premium for hours worked over 40 in a workweek, (3) limiting his or her work to 40 hours in a week, or (4) some combination of these options. How you address each affected employee will be largely dependent on individual circumstances. For example, if an employee makes slightly below the new minimum salary and regularly works overtime, you may consider giving the employee a raise to maintain exempt status. On the other hand, if an employee rarely works overtime, you may choose to pay overtime when required. However, knowing the best option for you and, more important, for each individual employee requires a clear understanding of the earnings, hours worked, and duties of each affected employee. And, the implications of these changes are farther reaching than simply reclassifying exempt employees as non-exempt, such as training newly non-exempt employees to use proper timekeeping methods and ensuring they are not working unauthorized overtime.
Remember, the minimum salary is not the only consideration in determining whether an employee is exempt from overtime. Instead, you must also apply a "duties test" to make sure the employee falls into one of the enumerated exemptions from overtime. Now is the time to take a good look at the duties your exempt employees are actually performing to ensure these employees actually meet the applicable tests, as you have an opportunity to ensure your employees are all properly classified under the new regulation and to make any adjustments to classifications without raising as many red flags. To take advantage of this opportunity, we suggest an overall wage and hour audit instead of only focusing on those moving to non-exempt because of the new minimum salary.
The exemption rules are fact-intensive and require knowledge of the applicable standards and definitions, so we highly recommend consulting with your employment attorney before making any changes to and regularly auditing your classification of employees.