The U.S. Department of Labor (the “DOL”) recently published a Final Rule updating its White Collar overtime exemption regulations. The Final Rule will become effective on December 1, 2016. The Final Rule changes the overtime pay exemption for certain salaried white collar and highly compensated employees under the Fair Labor Standards Act (the “FLSA”). The Final Rule significantly raises the base salary and wage thresholds necessary to satisfy the FLSA’s White Collar Exemption and Highly Compensated Employee Exemption, thereby creating potential overtime eligibility for salaried employees who were previously not entitled to overtime pay.
White Collar Exemption
Currently, employers do not have to pay overtime to employees who: (a) primarily perform executive, administrative, or professional duties, as defined by the DOL’s regulations (i.e., “white collar employees”); (b) earn at least $455 per week ($23,660 annually); and (c) are paid on a salary basis (e.g., predetermined amount each pay period; must be paid the full salary for any week in which the employee performs any work; salary may not be reduced because of variations in the quality or quantity of the work performed). Employees who met each of these three criteria would qualify for the White Collar Exemption. Each prong of the test must be satisfied for the exemption to apply.
The Final Rule changes one element of the three-pronged White Collar Exemption test; the Final Rule raises the minimum salary level (also known as the “Standard Salary Level”) from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). In other words, under the Final Rule, to satisfy the White Collar Exemption for previously exempt white collar employees currently earning less than $913 per workweek, as of December 1, 2016, employers will be required to pay such employees a salary of at least $913 per week to maintain their exempt status.
The Final Rule will also allow employers to begin using non-discretionary bonuses, incentive payments, and commissions paid on at least a quarterly basis, to satisfy up to 10% of the Standard Salary Level requirement. For example, a white collar employee’s salary may be set at 90% of the Standard Salary Level with the other 10% of the Standard Salary Level requirement being met by payment of non-discretionary bonuses paid at least on a quarterly basis. That is, assuming an employee satisfies the other prongs of the exemption test, the salary level prong could be satisfied if the employee is paid a salary of at least $42,730 provided that the other $4,746 in compensation to meet the Standard Salary Level of $47,460 is paid by way of non-discretionary bonus, incentive or commission. The DOL has made this change to recognize the importance of these other forms of compensation in today’s workplace.
It must be noted, however, that the new Standard Salary Level will increase over time. The Final Rule provides that the Standard Salary Level will automatically adjust every three years (beginning January 1, 2020) to match the 40th percentile of full-time salaried workers in the lowest-wage census region (currently the South region) at that time. The DOL will publish the new Standard Salary Level 150 days in advance of its effective date (beginning August 1, 2019).
Highly Compensated Employee Exemption
The DOL’s Final Rule also changes the base pay required under the Highly Compensated Employee Exemption. Under DOL regulations, certain employees whose total compensation (e.g. salary, commissions, and non-discretionary bonuses) exceeds a certain minimum need only satisfy a modified duties test to qualify for the White Collar Exemption.
Currently, employers do not have to pay overtime to employees who: (a) earn a total annual compensation of $100,000 or more, which includes at least $455 per week ($23,600 annually) paid on a salary basis; (b) primarily perform office or non-manual work; and (c) customarily or regularly perform executive, administrative, or professional duties, as defined by the DOL’s regulations. This exemption is commonly called the Highly Compensated Employee Exemption, or the HCE Exemption. Highly compensated employees meeting each of these criteria are not eligible for overtime pay.
As with the White Collar Exemption, the Final Rule also changes the minimum compensation thresholds for the HCE Exemption; the Final Rule raises the minimum total compensation requirement for the HCE Exemption from $100,000 annually to $134,004 annually (which amount is equal to the 90th percentile of full-time salaried workers nationally). The Final Rule also dictates that a highly compensated employee’s total compensation must include a salary of at least the amount of the Standard Salary Level (which, as discussed above, is set to increase to $47,476 annually on December 1, 2016). Bonuses, incentive payments, and commissions may make up the remainder of the minimum total compensation requirement, but may not be counted towards an employee’s base salary for purposes of the exemption. Unlike the standard White Collar Exemption test, there is no 10% limitation on applying non-discretionary bonuses, incentives or commissions.
The Final Rule also provides that the requirements for the HCE Exemption will update automatically every three years (at the same time the Standard Salary Level is adjusted). The minimum total annual compensation requirement will be adjusted to match the 90th percentile of full-time salaried workers nationally every three years, and the DOL will publish the new threshold amount 150 days in advance of its effective date.
Summary of Changes
Current Regulation Final Rule (eff. 12/1/16)
Standard Salary Level
$455 per week ($23,660 annually) $913 per week ($47,476 annually)
HCE Total Annual Compensation Level
$100,000 $134,004
Automatic Adjustments None: Standard Salary Level and HCE Total Annual Compensation Level are fixed.
Changes automatically every three years. Standard Salary Level = 40th percentile of full-time salaried workers in the lowest-wage Census region. HCE Total Annual Compensation Level = 90th percentile of full-time salaried workers nationally.
Non-discretionary Bonuses
Non-discretionary bonuses do not count towards satisfying the Standard Salary Level for purposes of White Collar Exemption.
Non-discretionary bonuses can be used to satisfy up to 10% of the Standard Salary Level requirement for purposes of the White Collar Exemption.
White Collar Exemption Employee must:
(a) primarily perform executive, administrative, or professional duties, as defined by the DOL’s regulations;
(b) earn more than $455 per week ($23,660 annually) in salary (non-discretionary bonuses do not count towards salary amount);
and
(c) be paid on a salary basis (e.g. predetermined salary for any work performed, no impermissible deductions).
Employee must:
(a) primarily perform executive, administrative, or professional duties, as defined by the DOL’s regulations;
(b) earn more than $913 per week ($47,476 annually) in salary (but 10% of this amount may be in the form of non-discretionary incentives, bonuses, or commissions);
and
(c) be paid on a salary basis (e.g. predetermined salary for any work performed, no impermissible deductions).
HCE Exemption Employee must:
(a) earn total annual compensation of $100,000 or more, which includes at least $455 per week ($23,600 annually) paid on a salary basis;
(b) primarily perform office or non-manual work; and
(c) customarily or regularly perform executive, administrative, or professional duties, as defined by the DOL’s regulations.
Employee must:
(a) earn total annual compensation of $134,004 or more, which includes at least $913 per week ($47,476 annually) paid on a salary basis;
(b) primarily perform office or non-manual work; and
(c) customarily or regularly perform executive, administrative, or professional duties, as defined by the DOL’s regulations.
Planning for the Final Rule (The White Collar Exemption)
Employers may have white collar employees who earn between $455 per week (the current Standard Salary Level) and $913 per week (the new Standard Salary Level). Starting December 1, 2016, these employees will no longer be exempt from the FLSA’s minimum wage and overtime requirements. Therefore, employers should take steps to identify these employees and determine what changes must be made.
With respect to these employees, employers have three basic choices as to how to proceed; employers may:
• Reclassify the affected employees as hourly wage employees and pay them for all overtime worked. These employees must be required to accurately track and record all of their hours worked, including time spent responding to after-hours demands, calls, and e-mails, and should be instructed to refrain from performing “off-the-clock” work while at home or while on rest or meal breaks. Under the FLSA, employers must keep accurate records of hours worked for all non-exempt employees.
• Split any affected position into two or more part-time positions spread between two or more employees to avoid the possibility of overtime liability.
• Give the affected employees a raise to the new Standard Salary Level of $913 per week (10% of this amount may be paid in the form of non-discretionary bonuses) and confirm that they primarily perform executive, administrative, or professional duties, as defined by the DOL’s regulations. Doing so will allow these employees to remain exempt from the FLSA’s overtime rules.
Practically speaking, most employers will be best served by employing a combination of these approaches. For instance, an employee who rarely works more than 40 hours and makes substantially less than the new Standard Salary Level should likely be reclassified as an hourly employee and paid for his or her overtime in accordance with the FLSA. Providing a raise to such an employee so that his or her salary meets the new Standard Salary Level would likely be cost prohibitive for the employer and would not provide a benefit in proportion to the added expense.
Conversely, an employee who regularly works more than 40 hours per week and makes just under the new Standard Salary Level should likely be given a modest raise to satisfy the new Standard Salary Level. The employer could also reclassify such an employee as an hourly worker and adjust the hourly wage so that the total amount paid each week for regular and overtime hours is roughly equivalent to his or her prior salary, but employers should consider the hidden costs of reclassification, such as a perceived loss of status and/or flexibility. Providing a modest raise in this circumstance may often make the most sense.
Planning for the Final Rule (The HCE Exemption)
Employers should also identify employees who are currently covered by the HCE Exemption, but who will no longer be exempt once the Final Rule goes into effect. As noted above, employees must be paid a salary of at least $47,476 annually (rather than $23,660 annually under the current rule) and receive total annual compensation in an amount equal to or in excess of $134,004 (as opposed to $100,000) to qualify for the HCE Exemption once the Final Rule is in effect. With respect to these affected employees, employers should consider the following strategies:
• Reorganize the compensation structure so that each employee receives a base salary of at least $47,476 annually. For example, for employees who typically earn more than $134,004 annually, but who earn a base salary of less than $47,476, employers may wish to pay a base salary above the new Standard Salary Level while reducing the amount of bonuses, commissions, and incentive payments that are paid. This strategy would allow the employee to remain exempt from the FLSA’s overtime rules while still earning roughly the same total compensation.
• Ensure that these employees’ total annual compensation is likely to meet or exceed $134,004. For example, if an employee regularly works more than 40 hours per week, and makes a base salary in excess of the new Standard Salary Level, but only receives total annual compensation less than the new threshold amount, the employer may decide to either increase that employee’s base salary, bonuses, commissions, incentive payments, or any combination thereof, to ensure that his or her total annual compensation satisfies the new required amount.
• Reclassify the affected employees as hourly wage employees and pay employees for all overtime worked. These employees must be required to accurately track and record all of their hours worked, including time spent responding to after-hours demands, calls, and e-mails, and should be instructed to refrain from performing “off-the-clock” work while at home or while on rest or meal breaks.
Again, employers will likely need to employ a combination of these strategies tailored to each affected employee’s or category of employees’ particular set of circumstances.
Conclusion
The changes made by the Final Rule are substantial and must be accounted for by employers. Proper planning now will be required in order to ensure compliance once the Final Rule becomes effective on December 1 of this year.
For more information, please contact Perkins Thompson’s Labor and Employment practice group.
