Department of Labor Issues Final Rule Increasing Salary Threshold for Overtime
June 16, 2016
On May 18, 2016, the U.S. Department of Labor ("DOL") issued its highly anticipated final rule significantly increasing the minimum salary employees must receive for employers to classify employees as exempt under the federal Fair Labor Standards Act. The DOL estimates that millions of currently exempt employees will become eligible for overtime pay. Below are the key provisions of the final rule:
- Increases the minimum salary threshold for the "white collar" exemptions: The minimum salary for the executive, administrative, and professional exemptions increased from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). This new salary level is based on the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South).
- Increases the annual compensation requirement for the highly compensated employee exemption: The total annual compensation requirement for the highly compensated employee increased from $100,000 to $134,004 per year. This new salary level is equal to the 90th percentile of earnings of full-time salaried workers nationally.
- Includes nondiscretionary bonuses and incentive payments in the salary calculation: For the first time, employers may count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new minimum salary requirement, as long as such payments are paid at least quarterly. This provision does not apply to highly compensated employees.
- Automatic updates to the minimum salary threshold: The standard salary level and highly compensated employee compensation requirements will be updated every three years to maintain the above earnings percentiles. The first update will take effect on January 1, 2020.
- No change to the duties test: The new rule does not change the tests for whether an employee's duties qualify the person for an exemption.
- Effective date: The final rule becomes effective on December 1, 2016.
Our Recommendations
Employers are advised to begin preparing now to ensure compliance with the new rule. We recommend that employers take the following steps:
- Conduct an audit of the classification of exempt employees: Employees who are paid a salary of less than $913 per week ($47,476 per year) and are classified as exempt will be eligible for overtime on December 1, 2016. Employers should evaluate their workforce and determine which employees qualify for exempt status. An employer can increase the employee's salary to at least $913 per week to maintain the exemption if the employee in question also meets the corresponding exemption's duties requirements. Alternatively, an employer can change an individual who no longer meets the pay requirement from exempt to nonexempt.
- Develop a plan of action for transitioning exempt employees to nonexempt employees:
- Update policies: Employers should review and update (if necessary) their policies that affect nonexempt employees. Because nonexempt employees must be paid for their hours worked, an employer should clearly communicate its expectations regarding recording hours worked, work schedules, and overtime hours. The employer's policies should clearly set forth any procedures or requirements for keeping accurate and complete time records of hours worked, requiring compliance with work schedules, and describing any other requirements such as obtaining prior authorization from a manager for overtime and prohibiting off-the-clock work.
- Conduct training: Employers should conduct training for both employees and managers. Nonexempt employees must be informed of the employer's policies and their responsibility to comply with such policies. In addition, managers also must understand such policies and be ready to enforce such policies.
- Thoughtful communications with employees: An employer should be mindful of how its response to the final rule will impact employees and should communicate with employees about any changes. To determine how to communicate with employees and frame its message, the employer should consider whether it expects employees' compensation to increase or decrease, whether the employer will prohibit or limit employees from working overtime, and how employee morale may be affected.
We Can Help
If you have questions, please contact Maslon's Labor & Employment Group for assistance.
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