United States: DOL's Increased Salary Test: What Employers Need To Know

For months, employers have been anxiously awaiting the Department of Labor's (DOL's) final rule on exemptions from overtime under the Fair Labor Standards Act (FLSA) and wondering whether the DOL would pass the rule as previously proposed or make modifications to its June 2015 proposed rule. Now the wait is finally over and, as anticipated, the DOL's final rule (which will be published in the Federal Register today) contains some significant changes for employers with salaried workers. Notably, this rule is only one of many new regulations that the President's Administration pushed through by May 23, 2016 in order to ensure they take effect before President Obama's term ends in January 2017. Below are several highlights of the final rule change, along with strategies employers should consider before the rule changes take effect.

What Does The Final Rule Change?

  • New minimum salary thresholds: As expected, the final rule, which becomes effective on December 1, 2016, more than doubles the minimum salary required to be exempt from overtime requirements under the FLSA's executive, administrative, professional, outside sales, and computer employee exemptions. Specifically, the final rule establishes $47,476 (up from $23,660) as the new minimum salary required for these exemptions, which corresponds to the 40th percentile of weekly earnings for full-time salaried workers in the lowest income region in the United States. The $47,476 minimum salary threshold is a decrease of approximately $3,000 from the proposed $50,440 minimum salary contained in DOL's proposed rule. However, even with this decrease, approximately 35 percent of current full-time salaried workers are expected to become automatically entitled to overtime absent changes to their existing salaries.

    In addition to the increase in the standard salary threshold, the final rule also provides for a significant increase in the minimum salary required to satisfy the highly compensated employee (HCE) exemption. The new salary threshold for highly compensated employees will increase to $134,004 per year (up from $100,000 per year) and corresponds to the 90th percentile of full-time earnings nationwide.
  • Automatic increases to the minimum salary thresholds: For the first time ever, the final rule provides for the minimum salary thresholds to automatically be increased every three years to take into account increases in the costs of living and to ensure that the minimum salary thresholds stay at the 40th and 90th percentile levels for the lowest income region in the United States. While these periodic increases are better for employers than the annual increases referenced in DOL's proposed rule, early estimates indicate that employers will be forced to pay salaries of more than $51,000 to maintain exempt status under the executive, administrative, professional, outside sales, and computer employee exemptions when the first salary increase takes effect in January 2020. For employees who are exempt under the highly compensated employee exemption, this threshold is likely to rise to more than $147,000 by the time of the first increase. The DOL will post the new salary thresholds at least 150 days in advance of their effective date, beginning in August 2019.
  • 10 percent rule for bonuses, incentive payments, and commissions: In response to numerous comments from the business community, the final rule allows up to 10 percent of the non-HCE salary to be satisfied by nondiscretionary bonuses, incentive payments, or commissions so long as those payments are made on at least a quarterly basis. However, the value of other fringe benefits, such as health insurance, still cannot be counted toward the salary threshold.

What Has Not Changed?

  • FLSA coverage: The final rule does not modify the requirements for coverage under the FLSA and continues to apply to (1) businesses or similar entities (enterprise coverage) and (2) individuals (individual coverage). With respect to enterprise coverage, the FLSA, including its overtime requirements, generally applies to businesses or similar entities that have sales or business of at least $500,000 per year, plus certain "named enterprises" which are covered regardless of their annual sales or business and regardless of their nonprofit status (e.g., hospitals, schools and preschools, government agencies, businesses providing medical, or nursing care for residents). In the case of other nonprofits which are not named enterprises, coverage is based only on activities they perform for a business purposes and does not include the organization's charitable activities. Likewise, income from donations, membership fees, dues, and other contributions used for charitable activities are not counted toward the FLSA's $500,000 enterprise threshold. Finally, certain employees may be entitled to FLSA protection under individual coverage, even if their nonprofit employer is not covered under enterprise coverage, if the employee is engaging in interstate commerce or the production of goods for interstate commerce. The DOL has issued specific guidance for nonprofit employers, which reiterates that there is no exemption for nonprofits under the FLSA and that any nonprofits that engage in significant commercial activities or that employ workers who engage in interstate commerce (by making out-of-state phone calls or sending or receiving mail, for example) must comply with minimum wage and overtime requirements.
  • Exempt duties tests: To the relief of many employers, the final rule also does not contain any changes to the duties tests for exempt status. Therefore, employers will continue to use the same duties tests to evaluate whether or not a position is exempt or nonexempt from overtime. Further, employees who are properly classified as exempt under the existing salary threshold will remain exempt after December 1 as long as they earn at least $47,476 (or $134,004 for HCE's) per year.
  • Fluctuating workweek method still available: Under the final rule, the fluctuating workweek method of calculating hours of work is still available and employers are allowed to continue to pay a fixed salary that covers a fluctuating number of hours at straight time if there is a clear, mutual understanding between the employer and employee regarding the salary and certain other conditions are met.
  • Certain exemptions not affected: Finally, the rule does not change the exemption for commissioned sales employees in retail and service establishments who must continue to be paid one-and-a-half times the minimum wage for all hours worked and receive a majority of their earnings in commissions. Certain other exemptions also remain unchanged by the final rule.

Impact of the Final Rule

The final rule is expected to have an enormous impact on employers. According to the DOL's fact sheet on the final rule, it will affect 4.2 million workers in the United States who are currently classified as exempt but earn less than $47,476 per year. The DOL estimates that employers will convert 4.1 million of these workers to hourly status, so they will be eligible for overtime pay, and that 100,000 of these workers will receive salary increases to satisfy the new minimum thresholds. The agency also estimates that, in the first year alone, the final rule will cost private sector employers $1.8 billion – $1.2 billion in payroll increases and $637.7 million in additional direct costs on employers, such as conducting audits on employees' exempt status and changing management practices to better track the time employees spend working. These costs will be particularly significant for employers in the retail and restaurant industries, which are likely to employ more lower-paid managers.

Compliance Strategies for Employers

In order to assist employers with compliance, the DOL has published several technical guidance documents containing several options for private employers, nonprofits, and higher education. These options include, but are not limited to the following:

  1. Raise salaries to $47,476 per year: For salaried employees who are at or near the new minimum threshold (and assuming employees are properly classified as exempt to begin with), employers can raise salaries for exempt workers to $47,476 per year and continue classifying them as exempt from overtime.
  2. Reclassification to nonexempt only: For salaried employees who work 40 hours or less per week and work no overtime, employers can reclassify employees who are below the minimum threshold as nonexempt and make no other changes to hours and pay.
  3. Reclassify and pay overtime above existing salary: For salaried employees who work more than 40 hours per week and do not earn at least $47,476 per year, employers may reclassify those employees as salaried nonexempt, have them track their hours worked, and then pay overtime (above and beyond base salary) for any hours worked over 40 hours per week.
  4. Reclassify and limit hours and/or divide workloads among multiple employees: Employers may also achieve compliance by reclassifying affected salaried employees as nonexempt and limiting employees' hours to no more than 40 hours per week or dividing workloads among multiple full-time or even part-time employees so that employees do not work more than 40 hours per week.
  5. Reclassify and adjust wages to account for additional overtime to be paid: Another option is for employers to reclassify affected salaried employees as nonexempt and adjust base wages downward (keeping in mind minimum wage requirements) in order to account for the additional wages that will be paid for overtime. Alternatively, in certain situations, employers and employees may agree to a fixed salary amount to be paid for a fixed number of hours per week.
  6. Use of volunteers (nonprofits only): In addition to the above options, certain nonprofit organizations may consider expanding their use of volunteers. However, nothing in the final rule changes the requirements for volunteers, who are generally limited to performing voluntary services for religious, public service, or humanitarian purposes and who perform service without expectation or receipt of compensation.

Next Steps for Employers

In advance of the December 1 deadline, all employers with salaried workers should audit the exempt status and salaries for their employees to ensure compliance with the DOL's final rule. Any audit should include a review of salaries to ensure that all exempt workers are paid at least the minimum salary required for exemption under the final rule. In addition, employers should use the final rule as an opportunity to closely analyze the job duties of positions about which there are classification concerns in order to ensure that the job duties for those positions satisfy the requirements of the existing duties tests. Employers will then need to work on raising salaries and/or reclassifying any employees who no longer qualify as exempt either due to the increased salary threshold or because they do not satisfy the applicable duties test. We recommend that employers promptly consult with their employment counsel for assistance complying with the DOL's final rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.