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
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions