Yesterday, the Department of Labor (DOL) announced its long awaited Final Rule amending the Fair Labor Standards Act’s (FLSA) salary test for white-collar employees. It significantly impacts which of your white-collar employees qualify as exempt from the FLSA’s overtime pay requirements.

The Rule, as expected, more than doubles the salary level at which one qualifies as an exempt white-collar employee (up from $455 weekly / $23,660 annually to $913 / $47,476 annually). The DOL estimates an additional 4.2 million more workers will qualify for overtime under the new rules.

The DOL says the rules also strengthen existing overtime protections for 5.7 million additional white collar salaried workers and 3.2 million salaried blue collar workers whose entitlement to overtime pay will no longer rely on the application of the duties test.

The effective date of the Final Rule is December 1, 2016, giving employers a little over six months to digest the new Rule, reclassify workers, and comply with the new salary test.

In addition to the salary-test increase, the new Rule:

  1. Sets the salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually).
  2. Permits employers to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. This is new to the FLSA, and a pleasant surprise for employers.
  3. Sets the total annual compensation requirement for highly compensated employees subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally (increased from $100,000 annually to $134,004).
  4. Establishes a mechanism for automatically updating the salary and compensation levels every three years (calculated based on the above-described 40th percentile measurement).
  5. Does not change the (EAP) exemptions themselves – only the applicable wage levels are changed.

Employers have a little more than six months to get their wage-and-hour houses in order. Employers need to determine which exempt employees make less than $47,476, and whether to switch these workers to non-exempt or gross-them up with salary increases or incentive payments to the new salary level to keep them exempt from overtime pay.

If you switch these workers to non-exempt, you will have to deal with the administrative issues that arise from tracking (or restricting) overtime and possibly of limiting flexibility of work hours. On the other hand, if you gross the workers up to keep them exempt, you may have to deal with the employee-relations issues that arise from salary contraction. Will an exempt general manager be happy that she is being paid nearly the same as her exempt manager / supervisee?

If you have any questions, concerns, or would like additional information on the aforementioned, please contact your HW&Co. executive.