Department of Labor Finally Announces New Exempt Salary Minimum Rule

By:  Sheila Gladstone

After much controversy and delay, on May 18, 2016, the U.S. Department of Labor (DOL) announced its “Final Rule” on the new salary minimum for employees to be exempt from overtime under the Fair Labor Standards Act (FLSA). The change shows a slight compromise from the DOL’s original proposal and will not go into effect until December 1, 2016, giving employers more time than originally thought to prepare.  This change will apply to all employers, including governments and non-profits.

The new salary minimum for employees to be considered exempt under the FLSA’s executive, administrative and professional exemptions will be $913 per week ($47,476/year). This is less than the $970/week originally proposed, but is still a significant increase over the current requirement that exempt employees must make at least $455/week or $23,660/year. The Final Rule now allows employers to use non-discretionary incentive pay to satisfy up to 10 percent of the required salary, as long as those additional payments are made at least quarterly.

The Final Rule also will raise the yearly compensation threshold for the special Highly Compensated Employee (HCE) exemption, from $100,000 to $134,004. HCEs are subject to a much easier duties test in determining exemptions, so long as their regular salary at least meets the (soon to be) $913 per week minimum for exempt employees, and their total compensation, including commissions, bonuses and other incentive compensation reaches $134,004 per year. If the compensation falls short at the end of the year, the employer can supplement up to the minimum rather than have to go back and figure out all the unpaid overtime.

Also, the original proposal required annual increases in the minimum salary indexed to the 40th percentile of the U.S. Southern Region’s average full-time salary and the HCE rate tied to the 90th percentile. Now, the increases are required only every three years. The first automatic update will take effect on January 1, 2020.

The DOL predicts that 4.2 million additional Americans will be eligible for overtime under the new rule, and that the resulting “wealth transfer” from employers to employees will average $1.2 billion per year.

Be aware that even if a worker earns the minimum salary, the duties of the position must still meet the other requirements for the various “white collar” exemptions under the FLSA, including the primary duties tests to be employed in a bona fide executive, administrative, or professional capacity. Nothing about the duties tests have changed with the Final Rule.

From a practical standpoint, it is time to review all positions with minimum pay grades below $913/week that are currently classified as exempt. Not only is the December 1, 2016 implementation deadline looming, but for most cities, budget decisions for next year are happening now. All employees classified as exempt must meet both the new salary requirement and the primary duties tests for the exemption. Employers must decide whether to raise these positions’ minimum salaries to $47,476, or to reclassify the position to non-exempt. For positions with a salary that is already close to the new minimum, a salary raise may be the best option. For lower paid positions, or where overtime is rarely required, reclassification may make the most economic sense. For reclassified positions that do require overtime, consider an hourly rate that, including anticipated overtime, is comparable to current compensation.

Other preparations for the change include updating policies and procedures to reflect the new standards, and, for those employees newly classified as non-exempt, conducting training on non-exempt-specific practices such as accurate timekeeping, use of comp time, and travel time rules.

For more information on exempt status, or to request a confidential audit of your workplace’s exempt classifications, contact Sheila Gladstone, Chair of Lloyd Gosselink’s Employment Law Practice Group, at 512.322.5863, or sgladstone@lglawfirm.com.

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