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Department of Labor Announces Final Overtime Rule

Today the U.S. Department of Labor (DOL) formally announced its Final Rule which more than doubles the minimum salary threshold for “executive,” “administrative,” and “professional,” employees to qualify as exempt from overtime pay under the Fair Labor Standards Act (FLSA).

The DOL estimates that the Final Rule, which will become effective on December 1, 2016, will extend overtime pay eligibility to 4.2 million workers and result in $1.2 billion a year in additional wages paid to employees. The DOL also estimates that this will make 35 percent of full-time salaried workers automatically entitled to overtime based on salary alone (up from an estimated 7 percent currently).

Key Provisions of the Final Rule

  • Increases the minimum salary threshold from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) for employees to qualify as exempt from overtime under the executive, administrative or professional (EAP) exemptions. This is slightly less than $3,000 below the level included in the proposed regulations and reflects the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region (currently the South).
  • Increases the total annual compensation requirement from $100,000 to $134,004 per year for highly compensated employees (HCE) to qualify as exempt, which is the 90th percentile of full-time salaried workers nationally. This number is near $12,000 more than the figure included in the proposed regulations.
  • Automatically updates the minimum salary threshold every three years, the first of which will take effect on January 1, 2020. The DOL will announce the new minimum salary level at least 150 days before its effective date. The current estimate of the salary level provided by the DOL in 2020 is $51,168. As with the current increase, the automatic updates will be keyed to the 40th percentile of full-time salaried workers in the lowest-wage Census region at the time of updating.
  • Non-discretionary bonuses, incentive pay or commissions of up to 10 percent of the salary threshold paid on at least a quarterly basis (approximately $91 per week and $4,750 per year) can be counted to meet the minimum salary requirement for EAP (but not HCE) employees. Employers also are permitted to make “catch-up” payments to employees in order to maintain the minimum salary requirement.
  • The Final Rule does not include any changes to the EAP duties tests.

The Final Rule also applies to the computer professional exemption, raising the hourly rate to $27.63 per hour. In addition, the new minimum salary threshold will be used to test whether employees are being paid a sufficient amount if they are being paid on a “fee basis.”

Implementation of the Final Rule

As the DOL notes, “employers have a wide range of options for responding to the changes in the salary level,” and likely will employ many different strategies throughout their workforces to comply with the Final Rule.

  • For EAP employees currently classified as exempt and earning close to the new salary threshold, employers may choose to increase the salary level to maintain exempt status (especially where the employee works substantially more than 40 hours per week).
  • In contrast, employees making less than $45,000 likely will be reclassified as non-exempt. For those employees, employers will need to assess how much (if any) overtime the newly reclassified employees likely will work and determine an hourly wage rate or salary for those employees taking into account those estimates.

Employers should consider the impact of the Final Rule generally, assessing its impact not only on individual employees and departments but more broadly looking at its effect on workflow and business operations.

For organizations that have a significant number of exempt employees currently earning less than $913 per week, compliance with the Final Rule will potentially have ripple effects throughout the organization, impacting the work of both exempt and non-exempt employees. The Final Rule also may well have the unintended consequence of creating salary compression at the lowest rungs of the exempt workforce and while at the same time creating an increased workload for the remaining exempt workforce.

Implementation of the DOL’s Final Rule for many organizations will be labor intensive, requiring the coordinated efforts of leaders from legal, employee relations, finance, and operations. Messaging to employees regarding any changes also will be important. Given the December 1, 2016, effective date of the Final Rule, employers should analyze the associated impact on their businesses and make modifications in order to comply.

Related Resources:

  • WEBINAR: Join us on Wednesday, May 25th at 11:00 a.m. ET for a webinar that will analyze the DOL's Final Rule on overtime that more than doubles the minimum salary threshold for white-collar workers under the FLSA. Click here to register
  • ARTICLE: "Employers Need to Assess Impact of DOL's Final Overtime Rule," Andrea M. Kirshenbaum,The Legal Intelligencer (May 20, 2016). Click here to view >