DOL Announces Deadline For FLSA Exemptions’ New Salary Threshold: December 1, 2016

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Threshold leaps from $23,660 to $47,476, affecting 4.2M workers. WILL YOU BE READY?

The Fair Labor Standards Act (FLSA) guarantees a minimum wage (currently $7.25 an hour) for all hours worked and limits the number of hours an employee can work per week to 40 hours. For every hour worked over 40, the FLSA guarantees additional compensation (one and one-half times the employee’s regular rate of pay). However, section 13(a)(1) of the FLSA provides the “white collar exemption,” which exempts from these minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional capacity.” An employer may utilize the white collar exemption if the employee meets the salary basis test, salary level test, and duties test:

• Salary Basis Test: the employee is paid a predetermined and fixed salary that is not subject to reduction.
• Salary Level Test: the employee’s salary meets the minimum specified amount.
• Duties Test: the employee’s job duties primarily involve executive, administrative, or professional duties.

On May 23, 2016, the U.S. Department of Labor formally issued the much-anticipated changes to the FLSA’s overtime regulations and, in particular, the updated white collar exemption’s salary level test. The new rules take effect on December 1, 2016. The final salary threshold is slightly lower than the Department’s original proposal, but still doubles the salary threshold for executive, administrative, and professional exemptions, raising the threshold from $23,660 to $47,476 a year, or from $455 to $913 a week. As expected, the existing duties test for the executive, administrative, and professional exemptions remains unchanged.

The new salary threshold is based on the 40th percentile of full-time salaried workers in the lowest income region in the country (currently, the South). To ensure the salary threshold is maintained at this 40th percentile, the new rules mandate an update to the salary threshold every three years. The threshold may rise to more than $51,000 with the first update on January 1, 2020.

The new rules also raise the salary threshold for the highly compensated employee exemption from $100,000 to $134,004.

In the face of these daunting new rules, there is one employer-friendly change — the salary basis test was amended to allow employers, for the first time, to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold. To credit nondiscretionary bonuses and incentive payments, the new rule requires the payments be paid on a quarterly or more frequent basis. In other words, each pay period an employer must pay the exempt employee on a salary basis at least 90 percent of the requisite salary threshold. Do note, however, that the use of nondiscretionary bonuses and/or incentive payments cannot make up the requisite salary threshold for highly compensated employees.

The Department of Labor (DOL) estimates the new rules will affect 4.2 million workers nationwide. This includes more than 370,000 workers in Texas, 330,000 workers in Florida, 100,000 workers in Tennessee, 66,000 workers in South Carolina, 60,000 workers in both Louisiana and Alabama, and 39,000 workers in Mississippi. Likewise, also affected are employers across a substantial number of industries. The Economic Policy Institute reported that the industries facing the biggest impact – in terms of the greatest share of salaried workers in the industry who will be affected by the new rules – include: agriculture, forestry, fishing, and hunting (39.7 percent); leisure and hospitality (37.3 percent); construction (32.6 percent); and public administration (32.5 percent).

According to the DOL, America is getting a raise. In reality, many businesses may not be able to afford the costly impact. For example, the National Retail Federation estimates that the new rules will cost retail and restaurant businesses $745 million to comply with the new rules. Thus, businesses will be forced to eliminate manager/assistant manager positions, scrupulously monitor overtime, switch to part-time labor, and/or increase the price of goods to help absorb the added costs. For those businesses that cannot afford to pay these (now) non-exempt employees overtime pay and/or raise employees’ salaries to maintain the exemption, they should consider reorganizing workloads, adjusting employees’ schedules and/or spreading work hours among employees.

With the new rules effective December 1, employers now have approximately six months to prepare and avoid misclassifications of these employees. We recommend employers conduct an internal audit with the assistance of qualified counsel of all the positions within your organization and identify all current employees classified as exempt with an annual salary below $47,476. Then, you should develop the proper strategy for (1) presenting a tailored message to all employees (whether affected or unaffected), (2) managing employees’ conversions to nonexempt status and/or continued exempt status, and (3) implementing comprehensive policies regarding nonexempt employees’ hours. These strategies are crucial to avoid potential litigation later.

For more information or assistance with an audit, contact Kate at kate.brownlee@arlaw.com, or Brooke at brooke.duncan@arlaw.com.

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