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CLIENT ALERT: Department of Labor Publishes Final Changes to Overtime Requirements Under the Fair Labor Standards Act

June 1, 2016

On May 18, 2016, President Obama and Department of Labor Secretary Perez announced the publication of the Department of Labor’s (“DOL”) final rule amending important overtime regulations under the Fair Labor Standards Act (“FLSA”).  The amended regulations, which will go into effect on December 1, 2016, more than double the salary level test that serves as a threshold for determining whether employees in executive, administrative, professional and certain IT positions (collectively, the “White Collar Exemptions”) are exempt from FLSA overtime rules. 

The revised regulations increase the standard salary level for White Collar Exemptions from $455 per week ($23,660 for a full-year worker) to $913 per week ($47,476 for a full-year worker).   In addition, the salary threshold for the exemption that applies to “highly-compensated employees” has been raised from $100,000 to $134,004.  As before, the salary test is only a threshold test and an analysis of an employee’s duties is still necessary for any exemption determination, though both the standard duties test and the highly compensated employees’ duties test remain unchanged.  Finally, the new rule also includes a mechanism to automatically update the salary threshold for all of these exemptions every three years, beginning on January 1, 2020.  (Notably, the DOL has taken the position in the past that it did not have the authority for such automatic updating.  Its new position may invite a judicial challenge to this aspect of the rule.) 

In a departure from the previously proposed regulations, the new rule allows up to 10% of the salary threshold for White Collar Exempt positions to be satisfied by non-discretionary bonuses, incentive pay, or commissions, provided that such payments are made on at least a quarterly basis.

The increase in the salary threshold is certain to cause headaches for employers due to the increase in the number of employees who likely will now be eligible for overtime.  The DOL estimates that the increase in the salary level threshold will result in an additional 4.2 million employees becoming eligible for overtime under the FLSA.  The DOL further estimates that these changes will result in total costs of approximately $295 million per year to employers for the first ten years.

We advise all employers to assess their current exempt positions in advance of the effective date for the final rule.  Employers should focus on those positions that currently fall under the White Collar Exemptions with salaries under $47,476, as these positions must be reclassified, or salaries adjusted, by December 2016.  Similarly, to the extent an employer employs individuals who otherwise qualify for the highly-compensated employee exemption but who earn less than $134,004, these positions must be assessed as well.

With respect to positions that currently are exempt but which will not meet the increased salary threshold, employers will have options: (1) reclassify the positions as non-exempt and (a) begin paying overtime to these employees for hours worked over 40 hours or (b) take proactive steps to limit these employees to no more than 40 hours work per week; or (2) to avoid overtime obligations, increase the employees’ salaries to the new salary threshold.  

A determination of the appropriate steps in a given work place will involve consideration of economic factors as well as the effect any changes may have on employee morale.  As part of this analysis, employers are encouraged to begin now to track actual hours worked by affected employees.  This will provide employers with the information necessary to make critical decisions about employee compensation and overtime budgets.

Notably, the final rule was issued in a time frame that will allow the next session of Congress, and the next president, to review and possibly “disapprove” the rule.  Pursuant to the Congressional Review Act, if a major rule is  submitted to Congress with fewer than 60 session days remaining on the legislative calendar – as was the case here –  the next Congress will have a similar 60-day period to consider the rule. If Congress disapproves the rule, the President may veto the disapproval.  Otherwise, the rule will be invalidated.  In short, the fate of the final rule ultimately will be at the mercy of the next Congress and president.