On December 1, 2016, the application of the “white collar exemptions” is going to change dramatically. Section 13(a)(1) of the Fair Labor Standards Act (FLSA) provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than a certain amount per week. Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the DOL’s regulations.
For years and years, the salary requirement for the white collar exemptions was set at $455 per week (about $24,000 per year). As you may be aware, this salary requirement figure is about to jump dramatically. The Department of Labor (DOL) has already announced its new Final Rule amending the salary requirement.
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:
- Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
The effective date of the Final Rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020. See https://www.dol.gov/whd/overtime/final2016/.
It will be important for employers to examine their wage structure and identify those employees that are exempt by job duties but do not make $47,476 annually. For these employees, the company will probably need to pick one of three solutions: (1) convert such employees to non-exempt and document hourly wages and overtime; (2) rely on a separate overtime and/or minimum wage exemption, if applicable; or (3) increase the compensation of the employee to meet the new annual salary requirement.
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