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Friday, June 3, 2016

Department of Labor’s Final FLSA Rule re: White-Collar Overtime Exemptions

On May 18, 2016, The United States Department of Labor released its final revised overtime rule under the Fair Labor Standards Act, 29 U.S.C. § 201 et. seq. (“FLSA”).  This rule represents the most significant modification of the FLSA’s overtime regulations in over twenty years. 

Prior to the rule, the longstanding overtime exemption requirements were: (1) employee is paid on a salary basis rather than an hourly wage basis; (2) employee is paid at a salary level of at least $23,660 annually (or $455 per workweek); and (3) employee’s duties meet the elements of a professional, administrative, executive, or outside sales (collectively referred to as “white-collar”) exemption.  Requirements (1) and (3) remain unchanged by the rule.  However the rule significantly modifies requirement (2) by raising the threshold salary level to $47,476 annually (or $913 per workweek).  Consequently, “white-collar” employees with a salary less than that amount will no longer be exempt, and therefore will need to record their time and be paid overtime for working more than 40 hours in a workweek.  This changed salary level has the potential to affect the wages of over four million U.S. workers in its first year of implementation. 

The rule goes into effect December 1, 2016, and applies to all employers covered by the FLSA.  In addition, the new salary threshold is not static; it is set to adjust every three years, beginning January 1, 2020, and tracking the 40th percentile of wages earned by full-time salaried workers in the lowest wage census region in the United States.  Other modifications made by the final rule include that “highly compensated” employees must be paid an annual salary of $134,004 (previously $100,000) in order to meet that exemption, and that employers will be allowed to include nondiscretionary bonuses and incentive payments, including commissions, in satisfying a portion of the minimum salary requirements for both “white-collar” and “highly compensated” employees. 

As a result of this final rule, employers should undertake a comprehensive and careful audit of their current wage and salary structures to ensure that they make appropriate adjustments for salaried employees classified as exempt currently earning between $23,660 and $47,476.  Based on each employer’s needs and staffing practices, there are several potential ways in which compliance with the new rule can be achieved, including: raising salaries, decreasing salaries to account for anticipated overtime, reclassifying employees, limiting or requiring pre-approval for overtime hours, redistributing workloads, using more part-time employees, using outside vendors to perform certain functions, and restructuring salaries to include bonuses/incentive pay. The enactment of this major change might also signal that it is a good time for employers to reconsider and update all of their exempt/nonexempt classifications, particularly with regard to jobs that have changed in the last 20+ years.  And, because the salary threshold level is set to adjust every three years going forward, employers need to continually review the above possibilities and consider their application to each employer’s particular workforce.

The foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation and should not be relied on as such.  Please contact one of our labor and employment lawyers if you have any questions.

This update was prepared by Charles S. Elbert, Kevin A. Sullivan, and Erin M. Leach.


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