US Department Of Labor Issues Final Rule On Long-anticipated Salary Increases For Overtime- Exempt Workers

The Obama Administration continued its rush to issue a whole host of new, wide-ranging regulations on employers today as the final year of President Obama’s term in office winds down.  This time, the US Department of Labor issued its long-anticipated Final Rule concerning the amount of salary a person must make to qualify for the “white collar” overtime exemptions under the Fair Labor Standards Act (FLSA).  While there were some minor changes to the original proposed rules, the changes made by the Final Rule are significant.

Beginning December 1, 2016, for a worker to qualify for the Executive, Administrative, Professional, or any other “white collar” overtime exemption, the minimum guaranteed salary they must receive will increase from $455 per week to $913 per week, or an annual equivalent of $47,476.  According to the DOL, this represents “the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region, currently the South.”  This threshold will be adjusted every three (3) years to the then current 40th percentile level of weekly earnings for full-time salaried workers, beginning January 1, 2020.  The new salary threshold will be published at least 150 days prior to its taking effect.

The Department also increased the threshold salary for “highly compensated workers” from $100,000 per year to $134,004 per year, or “the 90th percentile of full-time salaried workers nationally.”  This threshold will also be adjusted every three (3) years.

The Final Rule makes no changes to the “duties tests” used to determine whether those making at least the guaranteed minimum salary qualify for an overtime exemption.  Accordingly, those same rules will apply going forward.

Under the new rules, up to 10% of the salary threshold for non-highly compensated employees “may consist of non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis.”  This means that, under the new rules, if, by the last pay period of a quarter, the sum of the employee’s weekly salary plus bonuses, incentives, and commissions does not equal the minimum salary level for that quarter [13 x $913 per week or $11,869.00], the employer may make one final payment sufficient to bring the employee’s compensation to the required level by no later than the next pay period after the end of the quarter.  This will allow the employer to determine if these forms of supplemental income will cover the final 10% of the required weekly wage, and if not, cure it in order to preserve the exemption.  A similar rule, but viewed on an annual basis, also applies to highly compensated employees.

According to the Department, under the Final Rule, “4.2 million salaried workers will be affected . . . based on their salaries.  These workers are currently ineligible for overtime. The Department estimates that most of them (4.1 million) will become eligible for overtime when they work more than 40 hours . . ., while others (100,000) will receive a raise so that their salary is above the new threshold.”  The Department claims that “[a]s a result of this rule, an extra $1.2 billion a year will go into workers’ pockets (those earning between $455 and $913 a week).”  Yet according to its website, the Department “has issued a final rule that will put more money in the pockets of middle class workers – or give them more free time.”  So, whether workers who do not meet the new salary test will ultimately make more money remains to be seen.  The Administration, however, was intent on raising the salary threshold from the 2004 level, which sat at “less than the poverty level for a family of four and just 1.6 times the federal minimum wage” to a new level of “3.1 times the federal minimum wage for a full-time worker and twice the poverty level for a family of four.”

Employers should evaluate all exempt employees and determine whether those making less than $913 per week will get a salary increase, remain on salary with their hours limited to 40, knowing that these workers will be entitled to overtime compensation for any hours worked in excess of 40 in a workweek, or move to an hourly-based compensation system.  December 1, 2016, will be here soon, so the time to make this review is now.