Department of Labor Issues Final Rule Updating "White Collar" Overtime Regulations

Carrie L. Urrutia and Linsey K. Ohlman

    On May 23, 2016, the Department of Labor (DOL) published its long-awaited Final Rule updating the overtime regulations under the Fair Labor Standards Act (FLSA) for executive, administrative and professional employees – commonly known as the "white collar" exemptions. The Final Rule nearly doubled the minimum salary employers must pay "white collar" employees in order to maintain their exempt status. The DOL estimates that 4.2 million employees will be eligible for overtime compensation as a result of the Final Rule.

    The Final Rule differs in several respects from the proposed regulations published in July of 2015, which received over 270,000 comments and resulted in much debate among employers and employees alike. The key provisions of the Final Rule are described below.

    Salary Level Increase:  The most significant change made by the Final Rule is raising the standard salary level for the "white collar" exemptions to $913 per week ($47,476 annually), a significant increase from the current salary level of $455 per week ($23,660 annually), but slightly lower than the salary level initially proposed by the DOL ($50,440).

    Effective Date: The effective date of the Final Rule is December 1, 2016.

    Inclusion of Nondiscretionary Bonuses and Incentive Payments:  Under the current regulations, employers are not permitted to use commissions, nondiscretionary bonuses or other incentive payments to satisfy the salary level requirement. The Final Rule permits employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the minimum salary requirement. In order for employers to credit these bonuses and payments toward a portion of the minimum salary requirement, such payments must be made on a quarterly or more frequent basis. The Final Rule also permits employers to make a "catch-up" payment. For example, if, at the end of a quarter, an employee’s salary plus a 10% nondiscretionary bonus or incentive payment does not equal $913 per workweek, employers can avoid paying overtime by making a one-time "catch-up" payment in order to meet the salary requirements for that quarter.

    Highly Compensated Employees:  The Final Rule sets the total annual compensation level for highly compensated employees (HCE) equal to the 90th percentile of earnings of full-time salaried workers nationally. In order to be exempt as an HCE, an employee must be paid $134,004 annually, an increase from the current $100,000 threshold. The HCE must receive at least the new standard salary amount of $913 per week on a salary or fee basis. Bonuses and incentive payments can be used to reach the $134,004 annual salary threshold.

    Automatic Updates:  The Final Rule includes a mechanism to automatically update the minimum salary levels every three years. The DOL will publish the updated rates in the Federal Register at least 150 days before their effective date. Automatic updates to the thresholds will begin on January 1, 2020, and will occur every three years thereafter.

    No Changes to the Duties Tests:  The Final Rule does not contain changes to the duties tests for the white collar exemptions, a relief to most employers. The DOL previously sought comments on whether changes to the duties tests should be made, including whether to adopt the "California Rule," which provides that exempt employees must spend more than 50% of their time performing exempt work in order to maintain the exemption.

    The Final Rule raises numerous challenges for employers. Employers should identify the affected exempt positions where employees earn less than the new threshold amounts and determine whether to raise their salaries in accordance with the Final Rule or reclassify them as hourly, non-exempt employees. Either option poses employee relations challenges. Formerly exempt employees may not like the "stigma" of punching a time clock and may feel as though they have been demoted. Likewise, exempt employees who are already paid more than the new salary level may not appreciate their junior colleagues receiving significant pay raises. The next few months of working toward compliance with the Final Rule may not be easy, but employers are strongly advised to analyze their options, educate their workforces and develop a plan for implementation for timely compliance with the Final Rule.

    Should you have any questions or concerns regarding the Final Rule, please contact one of the attorneys in our Labor & Employment Practice Group.


    Disclaimer:  The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.