The new FLSA overtime rule on salary pay is here! Time to act now

On May 18, 2016, the Department of Labor’s (DOL) Wage and Hour Division announced publication of its final rule revising the Fair Labor Standards Act’s (FLSA) overtime regulations. Since the DOL offered up the new rule last year, which proposed to more-than-double the current $455/week exempt salary level, employers have awaited the final rule with trepidation. 

The DOL ended that wait today with their announcement. The final rule generally follows the DOL’s earlier proposal, with a few changes that provide employers with only minimal relief. Highlights of the new rule are detailed below.

What are the key changes in the final rule?

• The new salary level for exempt status is set at $47,476 per year, which is the equivalent of $913 per week.
  
  • This salary level increase applies to employees who are classified as exempt from the FLSA’s overtime requirements based on their status as executive, professional, or administrative employees.
    
• Employers may count nondiscretionary bonuses and incentive payments (including commissions) tied to productivity and profitability to satisfy up to 10 percent of the new salary level.
  
  • To credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, employers must make these payments on a quarterly or more frequent basis. The Final Rule also permits a “catch-up” payment.
• The Final Rule raises the salary level for “highly compensated employees” from $100,000 to $134,004.
  
  • HCE employees need only meet one element of the exemption criteria, but may be classified as exempt based on their high salary level.
• The new salary level will automatically increase every three years. The first update is January 1, 2020.
  
  • The new salary level is pegged to the 40th percentile of salary pay for full-time salaried workers in the lowest income Census region (currently the South).
  • According to the DOL’s wage growth projections, the salary threshold is expected to hit $51,000 by January 1, 2020.

When is the new rule effective?

The new salary level takes effect December 1, 2016. This gives employers just over six months to digest and implement necessary changes, which is a longer ramp up period than most expected. 

Will the new rule change the duties test for exempt positions?

No. Many speculated that the final rule would also include changes to the substantive duties test for determining exempt status. However, the final rule does not include any such changes. 

The new rule provides employers with a good opportunity to audit their exempt positions and determine whether those positions meet both the salary and the duties tests. 

Is there a new salary level for exempt part-time employees?

No. The new weekly salary level for exempt status – whether full-time or part-time – is $913 per week. If part-time exempt employees are below that threshold, employers will have to consider re-classifying as non-exempt or increasing the weekly salary.

What technical resources are available for employers?

The DOL has released a list of “Questions and Answers” on the final rule along with three technical guidance documents designed to help private employers, non-profit employers, and institutions of higher education come into compliance with the new rule.

Links to those resources are available here.

What steps should employers take to comply with the new FLSA final rule?

With an effective date of just over six months away, employers must act now to ensure that they are ready to implement the new rule. These steps include:

• Identify the positions affected by the salary level increase. 
• Evaluate options for responding to the changes. The DOL has offered the following suggestions:
  
  • Increase the salary of an employee who meets the duties test to the new salary level;
  • Pay an overtime premium of 1.5x the employee's regular rate for any overtime hours worked;
  • Reduce or eliminate overtime hours;
  • Reduce the amount of pay allocated to base salary and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
  • Use some combination of these responses.
• Budget for upcoming compensation changes.
• Train employees and managers on the new requirements.
• Work with payroll and other vendors to plan for and implement changes to timekeeping and pay processes.
• Let’s face it – no one likes change and for many employers and employees, this will be a big one. Communicate with employees about what to expect and when to expect it to avoid the uncertainty (and office gossip) that leads to morale issues. 

With summer looming, the cold days of December 1 may seem far off, but employers should not be complacent. Implementing these changes will take time. It is critical to begin the process now. 

Stay tuned here over the coming months for more updates and insight on the new FLSA overtime rules.