June 2016 – U.S. Department of Labor Issues Final Rule Increasing Salary Threshold for Exempt Employees

On May 23, 2016, the U. S. Department of Labor’s Wage and Hour Division (“DOL”) published its Final Rule amending the salary thresholds for exemptions from overtime for Executive, Administrative, Professional, Outside Sales and Computer Employees.  In order to be exempt from overtime pay after 40 hours in a work week, employees must meet certain minimum requirements related to their primary job duties and in most instances, must be paid on a salary basis at not less than the minimum amounts set forth in DOL’s regulations. Prior to the Final Rule’s changes, employees had to be paid a salary of at least $455 per week or $23,660 annually.

Although the Final Rule makes no changes to the currents duties tests for exemption, it roughly doubles the required weekly salary for a worker to be exempt from overtime pay under Fair Labor Standards Act. Effective December 1, 2016, employees must be paid $913 per week or $47,476 annually in order to meet the salary test for the exemptions.

In the new Final Rule, DOL allows employers to satisfy up to 10 percent of the new salary requirement with nondiscretionary bonuses, incentive payments and commissions, provided that this compensation is paid at least quarterly. Non-discretionary incentive bonuses are tied to productivity and profitability.

Previously highly compensated employees who earned a salary of at least $455 per week, were compensated more than $100,000 annually (such as commissions and non-discretionary bonuses), performed office or non-manual work, and customarily and regularly performed at least one of the specified duties of an exempt executive, administrative or professional employee were exempt from overtime. The Final Rule increases the salary requirement to $134, 004 annually. As of December 1, 2016, the employee must also receive the minimum salary of $913 per week not counting any non-discretionary bonuses or incentive payments.  However, incentive payments and non-discretionary bonuses are allowable for calculating the total compensation amount.

The Final Rule introduces an indexing formula that will automatically update the threshold salary amount every three years beginning in January 1, 2020.  Such a rule is new and unprecedented and will undoubtedly be challenged for its legality.  DOL’s action is in contradiction to the language of the Fair Labor Standards Act which does not allow automatic indexing without meeting the requirements of new rulemaking.

Commentators point out that once a new rule is made final, the Congressional Review Act gives Congress 60 legislative days to overturn the rule with a simple majority not subject to the filibuster. Bills have been introduced in the House and the Senate to overturn the new requirements in the Final Rule. How successful such efforts will be is not clear.

It is important that employers begin to plan now for the probable implementation of the new salary thresholds on December 1, 2016.  Employers should take this opportunity to immediately review the job duties and salaries of exempt employees who make under the new threshold amount of $913 per week. They will need to decide whether to bring the employees up to the threshold amount or to reclassify these employees as non-exempt. The impact of the new salary threshold will be greatest on smaller businesses and the retail and restaurant businesses as well as other service industry employers.

If you have any questions or concerns about what you need to do to implement and comply with DOL’s new regulations, please feel free to contact Dorothy Green, dgreen@lathamluna.com or the attorney at our firm with whom you usually work.