On May 18, 2016, the U.S. Department of Labor announced a final rule updating the regulations governing the exemption of executive, administrative, and professional employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act (“FLSA”). This rule will go into effect December 1, 2016 and is estimated to extend the right of overtime pay to approximately 4.2 million workers. Historically, the Department has required three tests to be met in order for the FLSA exemption to apply:

  • the employee must be paid a predetermined and fixed salary, not subject to reduction because of variation in the quality or quantity of work performed;
  • the amount of salary must meet a minimum threshold; and
  • the employees job duties must primarily involve executive, administrative, or professional duties.

Those three tests remain applicable, but the key provisions of the new rule update the tests as follows:

  • The standard salary threshold is doubled from $23,660 to $47,476 per year (equivalent to 40th percentile of full-time salaried workers in the lowest income Census region).
  • The total annual compensation amount for so-called highly compensated employees shall increase from $100,000 to $134,004 per year.
  • Those salary levels will automatically adjust every three years, beginning January 1, 2020.
  • For the first time, employers will be able to use nondiscretionary bonuses and incentive payments to satisfy up to 10% of the standard salary level.

The rule does not change existing job duty requirements to qualify for the exemption.

The primary impact of these changes will be for those employees in the gap between the old salary standard of $23,660 per year and the new level of $47,476 per year. For such employees, the employer must:

  • Increase their salary to the new level;
  • Track their weekly hours worked and pay overtime for hours worked in excess of 40 per week (which may prompt re-evaluation of their pay rate if the employer wants to neutralize the economic impact on the business of this change in status);
  • Reduce or eliminate overtime hours;
  • Add or increase nondiscretionary bonus or incentive pay to the base salary to meet the new minimum salary threshold (remembering that this cannot make up more than 10% of their total compensation and must be paid out at least quarterly); or
  • Use some combination of these responses.

For employees previously treated as salaried who are not going to be increased to the new base level, it is absolutely critical that measures be implemented to keep track of their compensable work time so as to ensure proper payment of overtime. This may be difficult for employees who are not used to keeping track of their work time, but in the absence of time records the Department of Labor will rely on the employee’s own accounting for time. Failure to properly pay overtime can result in payment of twice the amount of unpaid overtime plus attorney fees and even civil money penalties being assessed against the employer.

If you would like assistance in developing or implementing your organization’s response to the new rule, or would like more information on the overtime pay requirements and guidelines, contact a member of Rhoades McKee’s Employment Team.

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