Changes to the FLSA – White Collar Exemption

The U.S. Department of Labor’s long-anticipated “Final Rule,” regarding changes to the Fair Labor Standards Act (FLSA) was finally issued on May 18, 2016.  It updates the federal white collar overtime exemptions by raising the minimum salary required to qualify as an exempt employee to $47,476 per year.  The Final Rule becomes effective December 1, 2016.

What has changed?  -- By way of background, under prior regulations, employees needed to meet certain job duties tests and receive wages of at least $455 per week, or $23,660 annually, on a salaried basis to be exempt from the federal minimum wage and overtime requirements.  The Final Rule leaves the duties tests untouched.  However, and most importantly, it raises that salary level to $913 per week, or $47,476 per year. The Final Rule also raises the threshold for the exemption for “highly compensated” employees to $134,004 from the previous threshold of $100,000.

Good news -- The good news is that the Final Rule allows employers to include non-discretionary bonuses and commissions to satisfy as much as 10% of the required salary amount. In addition, if an employee does not earn enough in a particular quarter to meet the new salary threshold, the Final Rule allows the employer to pay the employee a “catch-up” payment within one pay period following the end of that quarter.  The Department will not be increasing the salary threshold for another three years.  However, at that point, and every three years thereafter, the threshold will increase.

Compliance Preparation - To get ready to comply, employers should review how employees are classified and compensated now in anticipation of the December 1, 2016, effective date to determine which jobs and employees may lose their exempt status. If any employee currently classified as exempt (who otherwise satisfies one or more of the duties tests) is not presently receiving compensation of at least the updated salary level, employers should weigh the following options:

  • Increase the employee’s salary to the new level to allow the employee to retain his or her exempt status if budgets allow.
  • Reclassify the employee as non-exempt and pay the employee overtime pay at a rate of one and one-half times the employee’s regular rate of pay for all overtime hours worked. (Indeed, employers can use the Department’s rule change as an opportunity to reclassify an employee who presently may be misclassified because the employee’s duties do not qualify him or her for any exemption.)
  • Prohibit the employee from working overtime (perhaps by hiring additional employees to perform similar job duties).
  • Reduce the employee’s base salary to account for overtime hours worked so that, when factoring in the overtime pay, the employee’s total compensation (regular rate plus overtime rate) going forward is consistent with the employee’s historic base pay. Of course, this approach is best undertaken after consultation with the employee to gain his or her buy-in to the concept.

Understandably, all of the foregoing options are going to have an impact in the workplace.  Messaging is critical, and employers should proceed cautiously and with guidance from Human Resources and employment law counsel.   For jobs and employees whose status changes from exempt to non-exempt, employers should be careful to reinforce existing overtime policies and train the newly classified non-exempt employees regarding such overtime policies, including with respect to timekeeping and refraining from working overtime without preapproval.