Department of Labor Imposes New Salary Requirements on Employers

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Do you hear that sound? It’s millions of workers rejoicing and employers groaning because the federal government has effectively required that employers give about four million workers a raise starting on December 1, 2016 to remain exempt from overtime payment. Yesterday, the Department of Labor issued its much anticipated Final Rule regarding “white collar” exemptions from minimum wage and overtime requirements. The rule imposes a massive increase in the salary threshold for workers to be exempt from overtime requirements. It will have a tremendous impact on employers. Let’s see what the Final Rule changes mean for employers.

What’s Changing?

Effective December 1, 2016, the salary requirement for exempt status will more than double, from $23,660 ($455 per week) to $47,476 ($913 per week). While the new threshold was lower than expected (a previous rule proposed $50,440), it was not chosen at random. $47,476 equals the 40th percentile of weekly earnings for full-time, salaried workers in the country’s lowest income region. While the current salary requirement was not tied to a mechanism for automatic increases, the new salary threshold will be updated every three years to reflect that 40th percentile benchmark.

The new rule also increased the threshold for highly compensated workers from $100,000 to $134,000. This will also be updated every three years and be tied to the 90th percentile of full-time salaried workers nationally.

Lastly, the new rule allows employers, for the first time, to count non-discretionary bonuses, incentive pay, and commissions toward as much as 10 percent of the salary threshold for non-highly compensated employees, provided such payments are made on at least a quarterly basis.

What’s Not Changing?

The DOL’s new rule does not change the duties tests concerning the white collar exemptions. These white collar exemptions are categorized as Executive, Administrative, Professional, Outside Sales, and Computer Professional. To be exempt from wage and overtime requirements, workers must make a minimum salary (as discussed above, currently $23,660 but moving to $47,476) and perform certain duties (for example, to meet the Executive duties test, the employee must supervise at least two other full-time workers, exercise independent judgment on significant matters, have authority to hire and fire, etc.).

There were hints that changes to the duties tests were coming, but those hints were wrong. Perhaps the DOL listened to employer concerns that implementing a new salary threshold and a new duties test would be too burdensome.

Congress has also hinted it would try to block this rule. However, any such attempt would have to overcome a presidential veto, and that won’t happen under President Obama.

What Does This Mean for Employers?

This monumental change will require employers to revisit their exempt classifications. Starting December 1, any employee who currently makes less than $47,476 will be automatically considered non-exempt and eligible for overtime for work performed over 40 hours in a week, regardless of their job responsibilities. That leaves employers with three choices for those workers:

  1. Increase their annual salary to at least $47,476;
  2. Pay them time-and-a-half for hours worked over 40; or
  3. Limit their work to 40 hours or less in a work week.

Industries with large segments of management workers below the new threshold, such as restaurants, retail, hotels, and nonprofits, will be most impacted by this new rule. But all employers should take time to review whether their exempt workers will still be exempt come December 1. If not, choose from among the three options above.

Note: The DOL Fact Sheet for the Final Rule can be found here.

If you have any questions about the content of this alert, please contact a key contributor.

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Key Contributors

Keelin A. Curran
Ryan S. Kunkel
Karen L. O'Connor
Edward J. Reeves
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