We’ve been waiting for months for the Department of Labor (“DOL”) to release its final regulations making changes to the Fair Labor Standards Act (“FLSA”) overtime exemptions, Part 541, and on May 18, 2016, the wait came to an end. As expected, the final rule includes a significant increase in salary threshold and a method to automatically increase the threshold every three years. Following are the highlights you need to know to be the master of the watercooler (or staff meeting) this week and some tips to help your organization tackle these important institutional changes.
1. Salary Threshold Change
The FLSA has always required three tests to be met in order for an employee to be considered exempt from the FLSA overtime requirements: (1) the employee must be paid a fixed salary; (2) the salary must meet a minimum threshold; and (3) the position must meet certain duties requirements applicable to executive, administrative, or professional positions. The final rule addresses the second of these requirements, the salary threshold. The threshold will more than double from its current amount of $455 to $913 per week, or from $23,660 to $47,476 annually for a full-year worker. This level is slightly lower than the threshold in the proposed rule, but will still affect many employees that are currently classified as exempt but make less than $47,476 annually.
2. Inclusion of Nondiscretionary Bonuses and Incentive Payments
For the first time, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. Such nondiscretionary bonuses might be tied to productivity and profitability. To take credit for such payments, the final rule requires such payments to be paid on a quarterly or more frequent basis and permits the employer to make a “catch-up” payment.
3. Salary Threshold Automatically Increases Every 3 Years
As anticipated, and for the first time, the DOL will index future salary thresholds to inflation every three (3) years. This is a change from the proposed rule which suggested annual increases. The inflationary adjustment will be based upon the 40th wage percentile for full-time salaried workers in the country's lowest-wage region as determined by the Census (currently that is the Southeast). The DOL will publish the increase in the threshold in the Federal Register at least 150 days before the effective date.
4. Highly Compensated Employee Exemption
The final rule mandates that the salary threshold for a highly compensated employee be set at the 90th percentile of full-time salaried workers nationally. Therefore, the threshold will be increased from $100,000 to $134,004 annually.
5. Duties Test is Unchanged
The proposed rule suggested that the DOL may make changes to the duties test mentioned above. However, no such changes were made.
6. Notable Exception
The final rule is effective December 1, 2016, except with respect to some health care providers that serve individuals relying on Medicaid. Those providers who serve people with intellectual and developmental disabilities in homes and small facilities will not be subject to the new rule until March 2019.
7. Effective Date is December 1, 2016
Many employers were concerned that the final rule would become effective sixty (60) days after publication. However, the final rule provides that it will not become effective until December 1, 2016. While many employers have already begun assessing positions that are at risk for reclassification, if you have not, there is time to adequately prepare for these changes. The most important step is to immediately identify which positions currently are classified as exempt from FLSA overtime requirements, but do not meet the salary threshold in the final rule. Important tips for conducting an audit were addressed in our PM Legal Minute Blog regarding preparing for the new rules: Employer Beware: Be Prepared for New Labor Regulations Coming in 2016. Don’t forget to ensure that each position that does meet the salary threshold also meets the requirements of the duties test. All three tests must be met in order to classify an employee as exempt from overtime.
After identifying vulnerable positions, it will be important to determine an effective communications strategy and ensure that any reclassified employees are aware of your overtime and timekeeping policies with which they may be unfamiliar. Government contractors should also ensure that they have assessed whether the affected employees will become subject to the Service Contract Act or whether these changes will affect the cost of performance because of overtime costs.
