Department of Labor Issues Final Rule Updating Overtime Regulations

Today, the U.S. Department of Labor (USDOL) issued its Final Rule modifying overtime requirements under the Fair Labor Standards Act (“FLSA”).  The Final Rule makes material changes to the application of overtime exemptions, and will take effect on December 1, 2016.

In 2014, President Obama directed the Secretary of Labor to simplify and modernize the overtime rules to make them easier for employees and employers to understand and apply.  As we previously wrote, in July 2015 the USDOL issued its proposed rule changes to the “white collar” exemptions to overtime pay, which apply to Executive, Administrative, Professional, Outside Sales and Computer Employees.  The proposed rules addressed the salary basis test but not the duties test, both of which need to be satisfied in order for the exemption to apply.  The USDOL requested comments from the public on its proposed changes to the salary basis test and on whether the USDOL should consider changes to the duties test as well.

By the time the comment period ended on September 4, 2015, the USDOL had received approximately 270,000 comments on the proposed rules.  Among the concerns expressed was that the USDOL sought a substantial increase in the minimum salary threshold from $455 per week ($23,660 per year) to $970 per week ($50,440 per year), with automatic annual revisions/increases.

The Final Rule modifies the salary and compensation thresholds for white collar workers, and does not address the duties’ test.  The USDOL believes that the increase in salary level “adequately distinguishes between employees who may meet the duties requirements of the [white collar exemptions] and those who likely do not. . . .”

Without further ado, the key provisions of the Final Rule provide for:

  1. Setting the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South), which, based on data from the fourth quarter of 2015 amounts to $913 per week; $47,476 annually.  The new salary threshold is more than double the current one.
  2. Setting the standard salary level for the “Highly Compensated Employee” exemption to the annual equivalent of the 90th percentile of full-time workers nationally.  This results in an increase to $134,004 from the current annual minimum of $100,000.
  3. Establishing a mechanism to automatically update the salary levels every three (3) years, to ensure that they remain at, but not lower than, the percentiles set forth above.
  4. Allowing employers to satisfy the salary test by using non-discretionary bonuses and incentive compensation (including commissions) to satisfy up to 10% of the new standard salary threshold, provided that such payments are made on a quarterly, or more frequent, basis.

Following the effective date of December 1, 2016, future updates to the salary level will occur every 3 years, beginning on January 1, 2020.  The USDOL estimates that in the first year of the Final Rule’s implementation, over $4 million workers will be affected by the increase.  The last time the Department of Labor made changes to its overtime regulations, including setting the standard salary requirement of $455 per week, was in August 2004.

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