Exempt or Non-Exempt: USDOL'S Final Rule Changes the Overtime Landscape

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Today, the United States Department of Labor ("USDOL") published its long-awaited Final Rule expanding overtime eligibility.  Under the Final Rule, which will become effective on December 1, 2016, employers may have to pay overtime to employees who never previously qualified for overtime pay because they were classified as "exempt" under the Fair Labor Standards Act ("FLSA").

Currently for a salaried employee to meet the threshold element of any of the "white-collar" overtime exemptions (e.g., executive, administrative, learned professional) under the FLSA, he/she must earn $455 a week (or $23,660 per year).  Under the Final Rule, a salaried employee will have to earn approximately double the amount of pay - $913 per week (or $47,476 per year) to be exempt from earning overtime pay.   

One notable exemption applies to "highly compensated" employees (those employees currently compensated more than $100,000 annually who primarily perform office or non-manual work).  The Final Rule increases the salary threshold to $134,004 annually for an employee to fall within the "highly compensated" employee exemption.  

The Final Rule also explains that the above-referenced salary thresholds will be updated by the USDOL every three years, based upon wage growth over time.  The first update will take effect on January 1, 2020 with future automatic updates occurring on January 1 of 2023, 2026, 2029, etc.  The USDOL will post the updated future salary thresholds on the Wage and Hour Division's website prior to the effective dates.

One benefit for employers under the Final Rule is that, for the first time, employers will be able to use non-discretionary bonuses and incentive payments such as commissions to satisfy 10 percent of the salary thresholds.  However, such payments must be paid on a quarterly or more frequent basis to be applied toward the salary thresholds.

Another benefit for employers is the USDOL did not make any change to the "duties" test applicable to each overtime exemption.  Therefore, an employer may be able to rely upon its prior analysis as to each employee's actual duties when determining if the employee falls within a particular overtime exemption (provided that employee will meet the new salary thresholds). 

Come December 1, 2016, however, employers may find that a significant number of employees, who were previously exempt from overtime pay, are entitled to earn overtime (in light of the increased salary thresholds) when they work more than 40 hours in a given work week. 

It is imperative that employers evaluate the status of their employees to determine whose status as exempt or non-exempt may be affected by an increase in the salary thresholds.  From there, an employer must determine whether to raise any affected exempt employee to the requisite new salary level so he/she remains exempt from overtime pay.  If that is not practical, then the employer must determine whether any employee needs to be reclassified from exempt to non-exempt and paid an overtime premium for any hours worked over 40 in a work week to comply with the Final Rule and the overtime obligation under the FLSA.  An employer is also well-advised to review its nondiscretionary bonus and incentive pay plans to determine whether they can use such payments towards meeting the new salary thresholds. 

Connell Foley's employment law attorneys are available to assist employers with navigating all of the nuances that come with this significant change in the overtime exemption landscape, including conducting managerial training to guide employers with implementation best practices.