By: Andrew Frost
On July 6, 2015, at the behest of President Obama, the U.S. Department of Labor (the “DOL”) proposed new rules regarding the exemption of executive, administrative, and professional employees from the minimum wage and overtime pay requirements of the Fair Labor Standards Act (the “FLSA”). The proposed rules did not change the job duties tests for exemptions, but did increase the salary basis tests with annual adjustments to place the salary thresholds at the 40th percentile of full-time salaried employees. The DOL released the final overtime exemption rules this morning, with an effective date of December 1, 2016.
The release of the finalized rules took longer than expected, leading many to believe that the finalized rules would also include changes to the duties tests. Fortunately, that is not the case. The following is an outline of the changes employers should prepare for by December 1, 2016:
New minimum salary requirement for executive, administrative, and professional exemptions
The new final rules set the minimum salary necessary for executive, administrative and professional exemptions at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region. As of December 1, 2016, that amount is set at $913 per week, or an annual equivalent of $47,476. This amount is $57 per week ($2,964 per year) less than the salary basis originally proposed by the DOL.
Also new with the final rules, employers will be permitted to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new salary basis for the exemptions.
Minimum salary requirement to be updated every three years
The minimum salary necessary to be eligible for an executive, administrative, or professional exemption will now be automatically updated every three years (beginning January 1, 2020) to maintain the levels at the 40th percentile. While this automatic updating is different than the static salary requirements previously provided in the exemption rules, the three-year adjustments are significantly more manageable for employers than the annual adjustments proposed by the DOL last July.
New minimum salary requirement for highly compensated employee exemption
Previously, employees that received at least $100,000 in total annual compensation, which included at least $455 per week on a salary basis, were exempt from the FLSA’s minimum wage and overtime requirements so long as the employees also met the job duties tests. The new final rules set the total annual compensation requirement for highly compensated employees at the 90th percentile of full-time salaried workers, $134,004 annually, which includes at least $913 per week on a salary basis. These annual compensation and salary amounts are also subject to the new 3-year automatic adjustments to maintain the levels at the 90th percentile.
Please note that the new rule permitting the use of nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new salary basis for executive, professional and administrative exemptions will not apply to the salary basis test for highly compensated employees because employers may already use nondiscretionary bonuses and incentive payments to reach the difference between the minimum salary amounts and the total annual compensation minimum.
While these new final rules significantly increase the minimum salary necessary to meet the salary basis test for minimum wage and overtime exemptions under the FLSA, the new salary minimums are less than originally proposed, less often adjusted than originally proposed, and do not require any new analysis regarding the exemptions’ job duties tests.
It is also important to remember that these new rules do not adjust state minimum wage and hour exemptions. As usual, employers must review both the state and federal exemptions and determine an employee’s exempt/non-exempt status based on whichever exemption test is most beneficial to the employee (i.e., the harder test to meet). For example, the FLSA permits an exemption for highly compensated employees, but Wisconsin law does not. Therefore, unless a highly compensated employee meets some other exemption, that employee would be subject to Wisconsin’s minimum wage and overtime rules.
With the effective date for the new final rules looming, now is an excellent time for employers to review all of their exempt positions, analyzing both the salary requirements and the duties tests necessary for a proper exemption under federal and state laws.
At Weiss Berzowski LLP, we regularly assist employers with wage and hour compliance and litigation. If you have any questions regarding the new final exemption rules, or wage and hour issues in general, please give us a call.