In a move that has been estimated to make an additional 4.2 million employees eligible to receive overtime, the United States Department of Labor (“DOL”) today revised the Fair Labor Standards Act (“FLSA”) regulations to more than double the weekly amount that employees must earn on a salary basis to meet the white collar exemptions to the FLSA (to a yearly salary of $47,476). The regulations mark just the third increase in the salary basis since the FLSA’s inception in 1938. The regulations also revise the pay requirements of the so-called “highly-compensated” exemption. The regulations will become effective on December 1, 2016.
Unless an employee meets an exemption to the FLSA, an employee must be paid at least the federal minimum wage for each hour worked, and one and one-half times the employee’s regular rate of pay for any hours worked in excess of forty (40) per week. The most common FLSA exemptions are the executive, administrative and professional (often referred to collectively as “the white collar exemptions”). In order to fulfill the requirements of the white collar exemptions, an employee must, with few exceptions, meet both a duties test (i.e., perform certain duties) and a salary basis test (i.e., be paid a fixed minimum amount per week that is not subject to reduction based on the quality or quantity of work performed). The DOL’s final regulations revise the salary basis test by increasing the weekly salary that an employee must earn in order to fulfill the salary basis test of the executive, administrative, professional and computer employee exemptions from $455 per week to the 40th percentile of weekly earnings for full-time salaried workers in the lowest wage region of the United States (currently $913 per week). The regulations provide, for the first time in the FLSA’s history, that the salary basis amount will increase every three years in order to keep pace with the 40th percentile of weekly earnings for full-time salaried workers. The final regulations provide that up to 10% of the standard salary level can come from non-discretionary bonuses, incentive payments, and commissions, paid at least quarterly.
The final regulations also modify the earnings requirements of the highly compensated employee designation that qualifies for a minimal duties test. Under the previous regulations, the employee was required to earn at least $100,000 per year in order to meet the earnings requirements of this exemption. The final regulations increase this annual earnings requirement to $134,004. Like the salary basis test, the annual salary requirement for the highly compensated employee exemption will be updated every three years by the Secretary of Labor to equal the annualized value of the 90th percentile of weekly earnings of full-time salaried workers.
Despite widespread speculation, the DOL did not issue any changes to the duties test of the white collar exemptions.
These new regulations give employers plenty to do and to consider in a short period of time. The increase in the salary basis test alone will require employers to reclassify large swaths of salaried exempt employees as non-exempt, overtime-eligible employees or increase their compensation to meet the new threshold. There are a number of payment options to be considered for newly reclassified employees. Communications to employees who are reclassified as non-exempt will be critical to a smooth transition period. Reclassified employees will need to understand that they are now required to record all hours worked. Employers should consider additional training for reclassified employees and their managers regarding proper timekeeping practices and procedures. Finally, employers may consider using the change in the law as an opportunity to reclassify as exempt positions that employers have been meaning to reclassify or which are borderline exempt.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
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