READY OR NOT, HERE THEY COME…Department of Labor Publishes Sweeping Changes to Overtime Pay Requirements

By: Meredith Jeffries

Last July, we alerted you that the U.S. Department of Labor’s Wage & Hour Division had published proposed revisions to the Fair Labor Standards Act (FLSA) exemptions from overtime pay requirements for “white-collar” employees. (See AR 2015 FLSA Alert).  Today, after almost a year of comment, debate, and speculation, the DOL has issued its final rule implementing the highly anticipated revisions (the “Final Rule”).

What changes does the Final Rule make to the FLSA?

  • It more than doubles the minimum salary requirement of the white-collar overtime exemption, from the previous threshold of $23,660 per year. Under the Final Rule, employees meeting the executive, administrative, or professional employee duties test must be paid at least $913 per week — $47,476 per year– to be exempt from the FLSA’s overtime pay requirements for hours worked in excess of 40 per week.
  • It increases the salary level at which certain white collar employees are exempt as highly compensated employees to $134,004 per year.
  • It adopts an index that will increase both minimum salary requirements for white collar exemptions every three years. The salary threshold for the white collar exemption will be adjusted to maintain a minimum salary threshold of 40% of the salary of salaried workers in the lowest wage Census region. The salary threshold for highly compensated employees will be adjusted to maintain a minimum salary threshold of 90% of salaried workers nationally.
  • The Final Rule permits employers to include nondiscretionary bonuses and incentive compensation payments, including commissions, to satisfy up to 10% of the salary threshold requirements.

How long do employers have to get into compliance with the Final Rule?  Employers are required to be in compliance with the Final Rule in 200 days, by December 1, 2016.  This is a significantly longer compliance window than the 60-day window that industry experts had anticipated.

What do employers need to do to get into compliance? If you have not already, you need to engage in a diligent review of your employee job classifications to determine whether employees you currently have classified as salaried, exempt employees may no longer qualify for an exemption from the hourly pay and overtime requirements of the FLSA. After determining which employees’ exempt status will be lost under your current compensation model, you should:

  • Assess whether to adjust employee salaries to maintain exempt status, keeping in mind that the salary threshold will increase every three years as discussed above.
  • Determine what bonuses and incentive payments may qualify for inclusion in the salary calculation, and evaluate ways that excluded compensation and employee benefits might be shifted to base salaries to maintain exempt status.
  • Consider the impact that adjusting the salaries of employees making below the salary threshold will have on your overall compensation structure.
  • Calculate the appropriate hourly pay rate, taking anticipated overtime hours into account, for employees converted to non-exempt status.
  • Develop a plan for messaging and addressing morale and workplace culture issues as changes are implemented.
  • Make required changes to employee handbooks, job descriptions, and payroll administration.

Why is this significant?  Litigation based on alleged violations of the FLSA and state wage laws continues to grow exponentially, with wage and hour lawsuits almost tripling over the last decade. Even before this watershed rule change, a number of legislative, regulatory, and litigation developments have converged to result in wage and hour disputes posing one of the biggest workplace threats to employers of all sizes. We expect that DOL audits, and wage and hour administrative claims and litigation, will increase under the Final Rule.

The Silver Lining. We often see employees categorized as “exempt” who do not clearly meet the duties test for exempt employees. The Final Rule gives you the opportunity to bring all of your employee classifications into compliance with the law as part of a broader company-wide re-evaluation.

How can Alexander Ricks PLLC assist you? If your company needs assistance understanding the Final Rule, working through your analysis of what employees are impacted, or determining which of a variety of available options you will use to bring your pay practices into compliance with the Final Rule, we encourage you to contact us for assistance.

Meredith Jeffries is a Member of Alexander Ricks PLLC. Meredith has two decades of experience in the area of labor and employment law and provides comprehensive transactional, counseling, training, and litigation services with respect to all aspects of the employer/employee relationship.