May 18, 2016

US DOL Doubles the Minimum Salary Threshold for Exemptions from Overtime

Arnold & Porter Advisory

US$47,476, or US$913 per week. Employers should become familiar with these new numbers. That’s because as of December 1, 2016, they will be the new minimum salary levels that most “white collar” workers must be paid to be properly classified as exempt from overtime under the Fair Labor Standards Act (FLSA). Put another way, most employees earning under US$47,476 per year will soon be automatically entitled to overtime, regardless of their duties or responsibilities. This increase more than doubles the current salary threshold of US$23,660, and is expected to expand overtime rights for at least 4 million employees.

The increase to the minimum salary threshold is part of the US Department of Labor’s (DOL) long-awaited final rules updating and expanding the salary and compensation levels needed for employees to be exempt from overtime under the FLSA’s executive, administrative and professional exemptions. The rules themselves were released on May 18, 2016, will be officially published on May 23, and will go into effect on December 1, 2016.

REMINDER: Employers must also comply with all state and local wage and hour laws, which often provide more protections than the FLSA.

What Is Significant About the Final Rules?

We previously published an Advisory on the DOL’s preliminary rules when they were issued in June 2015. Here’s what is important and what has changed.

  • The salary threshold for exemption has now been set at US$47,476. 
    • This is a significant (100%) increase over the current threshold of US$23,660, although slightly less than the US$50,400 level that the DOL had originally proposed.
    • The salary level is based on the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region
  • The threshold for exemption as a “highly compensated” employee has been raised to US$134,004. 
    • An employee earning at least this much in total compensation will qualify as exempt as long as he or she performs one or more function or duty under the executive, administrative or professional exemptions. 
    • The number is based on the 90th percentile of earnings of full-time salaried workers nationally. This, too, is a significant increase of the current threshold of US$100,000, and also represents an increase over the DOL’s original proposal of US$122,148.
  • Employers may now take into account certain nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level.
    • This is an entirely new concept that has never been part of the salary basis test before. Historically, the minimum salary threshold could only be met by guaranteed salary or fee payments to employees.
    • To count toward the minimum salary requirement, the bonuses, incentive payments or commissions must be nondiscretionary (i.e., tied to productivity, sales, or performance) and must be paid on a quarterly or more frequent basis. However, the amount of the bonuses or incentive payments attributable to the salary level is capped at 10 percent of the salary level.
    • In addition, employers may make a “catch-up” bonus or incentive payment within one pay period after each quarter, which would count toward the prior quarter’s salary amount (provided the employee was paid at least 90% of the salary threshold on a salary basis). 
  • The salary and compensation levels will be automatically updated every three years to keep them at the same percentiles.
  • There are no changes to the duties tests.
  • The Final Rule will go into effect on December 1, 2016.

What Should Employers Do Now?

Employers have approximately six months to come into compliance with the new salary rules, and should begin carefully reviewing and analyzing their workforce and pay practices. In particular, employers should consider the following steps and actions:

1. Identify all currently exempt employees with salaries below US$47,476 per year. For each such employee, carefully consider whether: (a) they continue to meet the duties test for one or more exemptions from overtime; (b) they are eligible for and have been paid nondiscretionary bonuses, incentive compensation or commissions that might be used to satisfy up to 10% of the new salary threshold; (c) their salary should be raised above the minimum threshold; (d) they should be reclassified as non-exempt and overtime eligible; and (e) if reclassified, their salary should be adjusted and/or their hours should be reduced or carefully managed.

2. Identify all currently exempt employees with total annual compensation between US$100,000 and US$134,004. For each such employee, carefully consider whether they meet one of the more stringent white collar exemptions and if not, whether it would be cost effective to raise their total compensation to qualify for the highly compensated employee test.

3. Conduct or hire outside counsel to conduct a privileged wage-hour compliance audit; review and update job descriptions and job postings; put in place proper hiring and classification procedures and processes; review and update handbooks and payroll policies and practices.

4. Continue to follow and abide by state and local wage and hour laws and regulations, in addition to the federal FLSA rules. Employers must abide by whichever law provides greater protections for its employees. While federal FLSA salary requirements were not previously relevant for California employers (which must pay exempt employees a salary that is at least twice California’s minimum wage, currently US$41,600 annually), as of December 1, 2016, California employers will now need to ensure any exempt employee earns a salary of at least US$47,476 annually, in addition to complying with California’s other wage/hour requirements. In addition, some states (like California) may not recognize the highly compensated test or the inclusion of nondiscretionary bonuses, incentive compensation and commissions.

5. Proactively discuss wage-hour classifications and other issues with your outside employment counsel.

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