Despite Uncertainty, New DOL Exemption Rules to Take Effect on December 1, 2016; California Sets New Rates for Computer Software Employees Exemption

by Wilson Sonsini Goodrich & Rosati
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Although the U.S. Department of Labor's (DOL's) new overtime rules are scheduled to go into effect on December 1, 2016, the results of the U.S. presidential election and a pending federal court case are causing some uncertainty for employers. In the federal court case, a judge is expected to decide by November 22, 2016, whether the new rules will be implemented as planned, or whether the court will issue an order preventing the DOL from implementing the rules. Uncertainty notwithstanding, employers must be prepared to take necessary actions by December 1, 2016, unless they are prepared to accept the legal risks associated with non-compliance.

As detailed in our WSGR Alert from May 2016, the DOL's new rules alter Fair Labor Standards Act (FLSA) regulations. The most noteworthy change is that in order to be properly classified as "exempt" under the federal administrative, professional, or executive exemptions (the so called "white collar" exemptions), an employee must make at least $47,476 per year on a salary basis (or $913 per week)—up from $23,660 under federal law and $41,600 under California law. The DOL estimates that the new rules will increase the wages of over four million employees.

Exempt employees are those who are not eligible for overtime pay, and in certain jurisdictions, meal and rest breaks. Non-exempt employees, by contrast, must be paid overtime when they work more than 40 hours per week under federal law. In California, employers must also pay non-exempt employees overtime if they work more than eight hours in a day or more than six days in a row, as well as provide them with meal and rest breaks.

Pursuant to the DOL's new rules, employers should make sure that their exempt administrative, professional, and executive employees are making at least $47,476 per year on a salary basis come December 1, 2016, and that these employees satisfy the federal—and state (where applicable)—duties tests to be eligible for exempt status. Employers also need to ensure that any employees classified as exempt under the highly compensated employee exemption (which is not applicable to California employers) are making at least $134,004 per year on a salary basis instead of $100,000.

Employers who may have misclassified employees should consider whether the rule change presents an opportunity to re-classify these employees. Even if timely compliance with the DOL's new rules is no longer administratively possible for some employers, they should nevertheless review their FLSA exemption classifications and make necessary changes as soon as possible so as to minimize potential exposure. In addition, employers concerned about incurring the expense of substantial overtime wages may want to consider other cost-saving measures, including the adoption and dissemination of more robust policies addressing the use and approval of overtime.

Of course, if an order is issued in the pending federal case preventing the new rules from taking effect, this would eliminate (or at least delay) the need for employers to comply with the new rules. It is also possible, of course, that the new Trump administration will take steps to roll back the DOL's new rules. Such action, however, will likely not take place immediately, and certainly not by December 1, 2016. As a result, employers who elect not to implement changes to ensure compliance with the new overtime rules do so at their own peril, and must appreciate that they may be on the hook for unpaid overtime, as well as the miscellaneous wage and hour violation penalties that typically accompany misclassification and overtime disputes. While the next presidential administration may indeed prove to be more employer friendly, it is unlikely that plaintiffs' lawyers will follow suit by refraining from expensive and disruptive litigation.

Finally, California employers should also be aware of the increased minimum salary requirements for the computer software employee exemption. The California Department of Industrial Relations recently announced that it has adjusted the computer software employee's minimum hourly rate of pay exemption from $41.85 to $42.35, the minimum monthly salary exemption from $7,265.43 to $7,352.62, and the minimum annual salary exemption from $87,185.14 to $88,231.36—all effective January 1, 2017.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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