Last week, the U.S. Department of Labor (“USDOL”) announced a Final Rule¹ updating the thresholds for certain “white collar” employees to qualify as exempt from the minimum wage and overtime pay protections of the Fair Labor Standards Act (the “FLSA”). According to the USDOL, the Final Rule will extend minimum wage and overtime protections to more than 4.2 million U.S. workers. Some of the key changes include:

• Increasing the standard salary level for executive, administrative and professional (“EAP” or “White Collar”) exemptions to $913/week or $47,476/year for a full-time, full-year worker;
• Permitting employers to use nondiscretionary bonuses and incentive payments, such as commissions, to satisfy up to ten percent of the new standard salary level;
• Establishing a mechanism for automatically updating the relevant salary and compensation thresholds every three years; and
• Increasing the total annual compensation requirement for “highly compensated employees” from $100,000 to $134,004.

In this Client Alert, we review these key changes and provide guidance on what clients need to do to come into compliance with the Final Rule, which goes into effect on December 1, 2016.

About the FLSA White Collar Exemptions

Under the FLSA, employers are obligated to pay employees minimum wage for all hours worked and overtime at a rate not less than one and one-half an employee’s regular rate of pay for all hours worked in excess of 40 in a single work week, unless employees qualify as “exempt”. Since 1940, the USDOL’s regulations have required each of three tests be met in order to establish that a White Collar employee is exempt from the FLSA’s minimum wage and overtime requirements:

(1) the employee must be paid a fixed salary not subject to reduction for variations in quality or quantity of work;

(2) the amount of salary must meet a minimum specified amount; and

(3) the employee must primary perform certain enumerated job duties qualifying the employee as an executive, administrative or professional employee (the “Duties Test”) as defined by the applicable regulations.

See 29 U.S.C. 213(a)(1); 29 CFR Part 541.

In 2014, President Obama directed the USDOL to “streamline and modernize” these overtime regulations, none of which had been updated since 2004. In June 2015, the USDOL issued a proposed rule, which received over 270,000 comments. The Final Rule, published on May 18, sets forth significant developments for U.S. workers and their employers.

The Standard Salary Level for Exempt Employees is Increased to $47,476 per Year

The Final Rule more than doubles the minimum salary level required to qualify as an exempt White Collar employee, increasing it from $23,660 per year ($455 per week) to $47,476 per year ($913 per week). In addition, the Final Rule incorporates a mechanism for automatically updating the minimum salary threshold every three years beginning on January 1, 2020, setting the threshold at the 40th percentile of annual earnings of full-time salaried workers in the lowest-wage Census Region (as defined by the U.S. Census Bureau). In so doing, the USDOL took a concrete step to address comments received during the rulemaking process requesting a way to ensure the minimum salary level remains an up-to-date and meaningful measure for determining exemption from overtime pay.

Nondiscretionary Bonuses, Incentive Payments and Commissions are Included in the Standard Salary Level

Under the Final Rule, for the first time, employers are permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to ten (10%) percent of the minimum salary level, provided such nondiscretionary bonuses, incentive payments and commissions are paid quarterly. Employers must pay exempt employees a weekly salary of at least $821.70 per week (i.e., 90% of $913) and any nondiscretionary bonuses, incentive payments and commissions which have become due and payable. If, at the end of a particular financial quarter, the sum of what the employer has paid that quarter in salary and nondiscretionary bonuses, incentive payments and commissions does not equal the minimum salary level for 13 weeks of work, the employer has one pay period to make a catch-up payment to address the shortfall, which catch-up payment should not be more than $91.30 (10% of $913).

Minimum Compensation for Highly Compensated Employees is Increased to $134,004

The FLSA currently provides an exemption for “highly compensated” employees, under which workers who meet a minimal duties test, but a higher salary test, are also exempt from overtime rules. The Final Rule increases the minimum total annual compensation threshold to qualify for this exemption from $100,000 to $134,004. This amount corresponds to the annual equivalent of the 90th percentile of earnings for full-time salaried workers nationally. To meet this exemption, an employee must (i) be paid a minimum weekly salary of $913, excluding nondiscretionary bonuses and incentive payments; (ii) be paid a total annual compensation of $134,004 per year, inclusive of nondiscretionary bonuses and incentive payments; and (iii) meet the applicable duties test, which remains unchanged under the Final Rule. Like the minimum salary threshold, the total annual compensation level to qualify for this exemption will automatically update every three years beginning January 1, 2020.

What Employers Need to Know and Do

Employers have until December 1, 2016 to prepare for and comply with the foregoing changes. We recommend using this time to consider which, if any, of your employees will no longer be exempt from overtime and minimum wage requirements under the Final Rule, and plan accordingly.

Audit Exempt Positions And Make Appropriate Changes As Applicable.  Employers are encouraged to audit exempt positions to ensure they comply with the guidance under the Final Rule and, where necessary, make changes to come into compliance with the Final Rule. For those employees who are paid less than $913 per week and meet the duties test for the White Collar exemptions, employers should consider, on a case-by-case basis, whether it makes sense to:

• Raise the employee’s base salary or offer additional nondiscretionary bonuses, incentive payments and commissions to meet the new minimum so that s/he remains exempt; or
• Reclassify the employee as non-exempt and

(i) Pay the employee the minimum wage and overtime in accordance with the FLSA; or

(ii) Maintain the current total compensation allocated to the employee by (A) limiting or not authorizing overtime for the employee or (B) reducing the base salary proportionally to account for the number of overtime hours the employee will be expected to work each week.

An employer’s approach to reclassifying employees may vary based on the particular employee’s current salary and the likelihood that an employee will work overtime. For example, it would likely be cost-effective to increase the base salary for employees who routinely work more than 40 hours each week. It may not, however, be cost-effective to increase the salaries of employees who rarely work more than 40 hours each week. An employer’s approach may also vary based on the employer’s size. For example, a large institution may be in a position to redistribute work among different employees to minimize the number of overtime hours incurred by members of its workforce, whereas a small firm may not.

Consider State Law.  The FLSA does not prevent states from establishing more protective wage and hour laws. For example, like several other states, neither New York nor Connecticut affirmatively recognize the “highly compensated” employee exemption.

Communicate Changes to Affected Employees.  To the extent an employer is increasing an employee’s salary or changing an employee’s exemption status, job description and/or eligibility for overtime, consider how these changes will be communicated to affected employees and who will be delivering the explanation(s).

If you have any questions or concerns about this alert, please contact Anne C. Patin (212-574-1516) or Julia C. Spivack (212-574-1373) at Seward & Kissel.

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¹ The Final Rule was announced on May 18 and published on May 23, 2016.