By Oyvind Wistrom

The U.S. Department of Labor issued its much-anticipated final overtime exemption rule on May 18, 2016, raising the minimum salary threshold required to qualify for the Fair Labor Standards Act’s (FLSA) “white collar” exemptions to $47,476 per year ($913 weekly).  The new salary test will apply to all administrative, professional, executive, outside sales and computer employees who are treated as exempt and salaried under the FLSA.  This new rule will affect approximately 4.2 million U.S. workers who are currently treated as exempt, but who would not satisfy the new salary test under the FLSA.

The rule has been a long time coming.  The first version of the new rule was proposed in June 2015 and drew approximately 300,000 public comments between June and September 2015.  That first version of the rule would have more than doubled the salary threshold from $23,660 per year ($455 weekly) to $50,440 per year ($970 weekly).  The final rule just issued still doubles the salary threshold, but reduced the proposed salary threshold by approximately $3,000.  The rule will take effect on December 1, 2016.

Under previous regulations, employees had to meet certain tests related to job duties and be paid at least $23,660 per year ($455 weekly) on a salary basis to be exempt from the minimum wage and overtime requirements under the FLSA.  While DOL’s final rule raises the salary level significantly, non-discretionary bonuses and incentive payments can now count for up to 10 percent of the new salary level, provided the payments are made at least quarterly.  This change has been viewed by some commentators as DOL “throwing employers a bone” in the final rule.  In addition, this new salary threshold will be automatically updated every three years to ensure it stays at the 40th percentile benchmark, according to the Obama administration.  The final rule also raises the overtime eligibility threshold for “highly compensated” workers from $100,000 annually to $134,004 annually.

Employers have a range of options in responding to the updated standard salary level.  For all employees who are currently treated as exempt under the FLSA’s “white collar” exemptions, but who are paid less than $47,476 per year ($913 weekly), the following options exist:

• Increase the salary of the employee to at least the new salary level to maintain his or her exempt status;
• Convert the salary to an hourly rate and pay the overtime premium (one and one-half times the employee’s regular rate of pay) for all hours worked in excess of 40 hours in a week;
• Control, reduce or eliminate overtime hours;
• Reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) in order to account for overtime hours worked in excess of 40 hours (paying employee time and one-half for all overtime hours), to hold total weekly pay constant; or
• Use some combination of these responses.

In determining which course of action to utilize, employers should analyze their workforce and determine which solution best suits their particular needs.  For salaried, exempt employees who regularly work overtime and currently earn slightly below the new standard salary level, employers may be best suited to raise the employees’ salaries to the new salary level to retain the “white collar” exemption.  For employees who rarely or almost never work overtime hours, employers may be best suited to start treating those employees as non-exempt, pay the employees a standard hourly rate, and pay the overtime premium when necessary.

If you have questions about this material, please contact Oyvind Wistrom by email at owistrom@lindner-marsack.com or by phone at (414) 273-3910, or any other attorney you have been working with here at Lindner & Marsack, S.C.