On Wednesday, the federal Department of Labor’s Wage and Hour Division issued final regulations that dramatically increase the minimum salary required to claim exemption from the overtime provisions of the Fair Labor Standards Act. The final rules apply to executive, administrative and professional employees covered under the Part 541 salary test.
As of December 1, exempt employees must be paid a minimum salary of $913 per week, or $47,476 per year. This figure is somewhat lower than that contained in the proposed rule because DOL chose to base it on the 40th percentile of salaries paid in the lowest wage part of the U.S. Still, this salary more than doubles the current minimum of $23,660.
DOL will update the minimum salary every three years, beginning on January 1, 2020. It will automatically increase (or conceivably decrease) based on wage growth over that period of time. The current highly compensated employee exemption will increase from $100,000 to $134,004 per year on December 1. DOL also accepted an employer proposal to allow up to 10 percent of the new salary level to come from bonuses and incentive payments.
Importantly, DOL followed its intent in the proposed regulations not to make changes to the current duties tests for the white collar exemptions. Labor advocates had pushed for inclusion of minimums on time spent on exempt duties to qualify for the exemptions, but DOL decided to make no changes to the current requirements for the exemptions other than the minimum salary.
The final rules attempt to address concerns raised by colleges and universities, and non-profit employers. Non-profits often pay below market salaries, and may have limited ability to meet the new salary requirements. DOL issued a guidance for non-profits that does not create any general exemption from the new salary requirements. However, the agency noted that the FLSA does not cover certain enterprises with revenues under a minimum level, and those that do not engage in interstate commerce. DOL also stated that it will not seek to extend its jurisdiction to non-profits with only minimal connections to interstate commerce. For educational institutions, the rules note special exemptions contained in the existing duties tests, as well as a compensatory time option for public institutions.
Employers have several options to comply with these new requirements. They can raise salaries to meet the new minimum. They can also convert current exempt employees to non-exempt and begin paying overtime. The new salary or hourly wage can be adjusted downward to account for anticipated overtime. Employers may also consider alternative wage payment plans such as fluctuating workweek to try to reduce overtime exposure. Finally, companies can establish and enforce administrative rules intended to control overtime worked by employees.
Business groups will likely file legal challenges seeking to block the new rules. By limiting the changes to the salary test, DOL may have curtailed the ability of these groups to obtain judicial intervention. Absent any court action to delay implementation, the new minimum salaries will take effect on December 1, 2016.