The Department of Labor has released its Final Rule, which is aimed at expanding overtime eligibility for millions of American workers. At its core, the final version of the rule doubled the minimum salary employers must pay “white collar” workers to maintain their exempt status. Notably, the final rule did not make any changes to the job duties test. The Rule will go into effect on December 1, 2016. Between now and then, all employers should review the classifications of all workers they currently treat as exempt under the white collar exemptions to ensure that those employees are properly classified when the new Rule goes into effect. We briefly summarize the key provisions from the rule below.
Key Provisions of the Final Rule
- More Than Doubles the Salary Threshold for White Collar Exemptions to $913 per week ($47,476 annually). The Final Rule establishes a salary threshold for the executive, administrative, professional, computer and outside sales exemptions at $913 per week or $47,476 annually. This threshold doubles the current salary threshold ($455 per week or $23,660 annually), but is slightly lower than the threshold originally proposed by the DOL last July ($970 per week or $50,440 annually).
- Increases the Salary Threshold for Highly Compensated Employees to $134,004 per year. The Final Rule establishes a salary threshold for highly compensated employees (HCE) at $134,004 annually. The current threshold is $100,000 per year. (Like other white collar workers, HCEs must also meet the minimum weekly salary threshold of $913 per week.) The Final Rule uses the same methodology for calculating the annual threshold as the proposed rule, but using updated Bureau of Labor figures, it increased the threshold from $122,148 per year.
- Establishes a Mechanism for Automatic Updates to the Salary Thresholds. The Final Rule includes a mechanism for automatically updating the salary levels every three years to maintain the salary threshold at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region for white collar workers and the 90th percentile of full-time salaried workers nationally for HCEs. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020. The DOL will publish updated rates in the Federal Register at least 150 days before their effective date. This is a significant change from the proposed rule, which would have updated the salary threshold annually.
- Allows Employers to Use Nondiscretionary Incentive Compensation to Meet up to 10 Percent of the New Salary Threshold. Addressing a longstanding complaint from employers who pay employees on commissions or using other incentive compensation, the Final Rule amends the salary basis test for white collar workers to allow employers to use nondiscretionary bonuses, commissions and other incentive payments tied to productivity and profitability to satisfy up to 10 percent of the new standard salary level. (This change does not extend to HCEs for the weekly threshold, but employers may continue to count incentive compensation and other nondiscretionary deferred compensation paid at least annually to the total annual HCE threshold.) To receive credit for nondiscretionary bonuses and incentive payments toward the standard salary level test, employers must make such payments on at least a quarterly basis. This means that annual nondiscretionary bonuses will not count towards the threshold unless they are paid more frequently. The Final Rule also permits the employer to make a “catch-up” payment to maintain the exemption if an employee does not receive enough in nondiscretionary bonuses and incentive payments in a given quarter to remain exempt.
- No Changes to the Duties Test. In one win for employers, after seeking comment on the duties test in the proposed rule, the DOL did not make any changes to the actual tests in the Final Rule.
- Effective Date of December 1, 2016. In another win for employers, the effective date of the Final Rule is December 1, 2016, which provides employers additional time to evaluate the impact on their workforce and implement changes.
According to the DOL however, the Final Rule could extend the right to overtime pay to an estimated 4.2 million workers who are currently classified as exempt based on their job duties and salary level.
In the coming days we will discuss the rule’s impact and address related workplace issues on which employers should focus in advance of its December 1st implementation date. The common thread running through these upcoming posts will center on the choices employers face in complying with the rule. Employers must consider whether their exemption classification decision, in addition to complying with the law, aligns with the strategic goals of the organization, fits within their business model and certain budgetary constraints, accounts for the type of industry and regions in which they operate and the overall competitive landscape, along with the organization’s culture, among other factors. It must also be communicated to employees in a way that will maintain or create outcomes that maximize output and morale, while reducing turnover costs and exposure to lawsuits. After running this analysis, employers should then decide how, if at all, they will change their pay practices to satisfy the dictates of the new rule. Check back regularly on our Employment Matters blog for more on these issues.
At a minimum, we would recommend that employers discuss with counsel how the rule impacts their business and what, if any, changes are needed. This may also serve as a great opportunity for employers to revisit their classifications decisions for a broader segment of their workforce and make any necessary changes. Attorneys in our Employment, Labor & Benefits practice continue to monitor the implications of the decision.
If you have any questions about the DOL’s Final Rule or its impact on your business, please feel free to contact the authors of this alert.