DOL Releases Final Rule on Overtime Exemptions
DOL Releases Final Rule on Overtime Exemptions
This morning the Department of Labor formally released its long-awaited Final Rule on Overtime Exemptions. So let’s cut to the chase: the new salary level is $47,476 per year ($913/week), annual increases will occur every three (3) years, and the effective date is December 1, 2016.
How Did We Get Here?
As you may remember, on March 13, 2014, President Obama issued a Presidential Memorandum directing the DOL to update the white collar exemptions, as they had not been updated since 2004. In July 2015, the DOL issued its Notice of Proposed Rulemaking that, for the most part, focused on changes to the salary level requirement for employees to be considered exempt from the minimum wage and overtime requirements. Since July, and particularly over the last month, employers have waited in nervous anticipation of the final rules. Well, they have arrived.
Standard Salary Level
The Final Rules set the minimum salary level to qualify for exemption status at $47,476 per year for most occupations, which equates to $913 per week. While this a compromise from the $50,440 ($970/week) that was originally proposed, it is likely not the compromise hoped for by most employers. The new salary level essentially doubles the current minimum salary requirement of $23,660. The DOL states that this number responds to public comments regarding regional variations in income and reflects the 40th percentile of salaried workers of the lowest income Census region (currently the South).
Highly Compensated Salary Level
The new salary level for “highly compensated” employees will increase from $100,000 to $134,004. This number reflects the 90th percentile of earnings of full-time salaried workers, and does not account for regional variations in income.
Inclusion of Nondiscretionary Bonuses and Incentive Payments
Notably, employers will now be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level (up to $91 of the $913 per week threshold, which means the employee must receive $822 per week on a salary basis). Such incentive payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability. In order to credit such payments, the payments must be paid on a quarterly or more frequent basis. If, however, an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given quarter to retain their exempt status, the DOL will permit a “catch-up” payment at the end of the quarter. In that scenario, the employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level for the preceding 13 week period). Any such catch-up payment will count only toward the prior quarter’s salary amount and not toward the salary amount in the quarter in which it was paid. If the employer chooses not to make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the quarter.
The DOL states that if an employer pays larger bonuses, the amount attributable toward the standard salary level is capped at 10 percent of the required salary amount. Employers may want to reconsider its bonus structures (and at very least, the timing of such payments), to be able to take advantage of this new option.
The Final Rules continue the requirement that “highly compensated” employees must receive at least the full standard salary amount (now $913/week) each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments, and continues to permit nondiscretionary bonuses and incentive payments (including commissions) to count toward the total annual compensation requirement. The DOL concluded that permitting employers to use nondiscretionary bonuses and incentive payments to satisfy the standard weekly salary amount for “highly compensated” employees is inappropriate because employers are already permitted to fulfill almost two-thirds of the total annual compensation requirement with commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation.
Automatic Increases Every Three Years
The Final Rules also provide for automatic increases every three (3) years, as opposed to on an annual basis as originally proposed. The DOL will publish the updated rates in the Federal Register at least 150 days before their effective date, and also post them on the Wage and Hour Division’s website.
The DOL states that the automatic updates will be based on the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage Census Region for the standard salary level, and the 90th percentile of earnings of full-time salaried workers nationwide for the HCE salary level.
The first update will take effect on January 1, 2020; future automatic updates will take effect on January 1 of 2023, 2026, etc.
Duties Test
Notably, the DOL did not make any changes to the “duties” test.
Effective Date
Finally, in perhaps their biggest compromise in this endeavor, the DOL has given employers additional time to adjust to the salary level increase. The effective date of the Final Rule is December 1, 2016, which means employers will need to increase the relevant salary levels by that date for its employers to remain exempt.
Congressional Override?
The Final Rules come after the date by which the rule could avoid a Congressional override under the Congressional Review Act. While this is the case, and an override is possible, much will depend upon the results of the upcoming election. Simply put, a Democratic majority in Congress will be less likely to override such a rule, and a Democratic President will be more likely to veto any Congressional opposition to the rule. For now, employers should not place their hopes on an override of the rule. Instead, employers should focus on preparing for compliance by December 1, 2016.
What Now?
Hopefully, most employers have analyzed their workforce to determine who may be affected by an increase in the salary level. For those who have not, they must do so immediately. From there, employers will need to determine whether to raise any affected exempt employees to the requisite salary level so they remain exempt from the overtime requirements. If that is not possible, they must be made non-exempt and be paid an overtime premium for hours worked in excess of 40 in a workweek. In that scenario, employers may choose to eliminate or reduce overtime hours worked, reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek (to hold total weekly pay constant), or explore a combination of these options.
Employers should also review their nondiscretionary bonus and incentive pay plans to determine whether they can use such payments towards meeting the salary level.
The DOL has issued several guidance documents related to its Final Rules on its website. Baird Holm will also host a webinar in the near future on these new rules, and more importantly, on how to implement them in a way which best suits your workforce. Stay tuned for more information as it develops.