In 2014, President Obama directed the Department of Labor to update the regulations governing exemptions of executive, administrative and professional (EAP) employees from the minimum wage and overtime pay protection of the Fair Labor Standards Act (FLSA)1. President Obama and Secretary Perez announced on May 18, 2016, the Department of Labor’s final rule updating overtime regulations, which will automatically extend overtime pay protections to over 4 million workers within the first year of implementation.2
The Final Rule1 simplifies identifying those overtime-protected employees and updating the salary level required for exemption status. This will make the EAP exemption far easier for employees and employers to understand. Additionally, the Final Rule extends the right to overtime pay to an estimated 4.2 million workers who currently are classified as exempt. The Final Rule will reinforce overtime protection to approximately 3.2 million blue-collar workers and approximately 5.7 million works whose entitlement to overtime pay will no longer rely on the application of the duties test.
Key Provisions of the Final Rule2
The Final Rule focuses primarily on updating the salary and compensation levels needed for EAP workers to be exempt. Specifically, the Final Rule:
- Sets 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 is $913 per week or $47,476 annually for a full-year worker;
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004; and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. The Final Rule makes no changes to the duties tests.
The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
How these new exemptions will affect your business:
- Higher labor expenses;
- Some employees will be overtime (OT) eligible, and if his/her job requires more than 40 hours per week, OT kicks in;
- More people may need to be hired to minimize the OT hours worked by employees now classified as non-exempt and/or,
- Salaries may need to increase to $47,476 per year to keep employees exempt;
- Salary compression issues.
How can vcfo HR help?
- Our consultants will walk through the key elements of the new regulation and how it impacts your business, and will offer a customized strategy to minimize cost and legal concerns.
- We have expertise in FLSA compliance and can provide assistance in determining the proper classifications and assist in addressing salary compression issues.
- Our highly trained consultants will offer the appropriate means to communicate changes to the employees.
Kelly Wells is a Senior Human Resources Consultant for vcfo’s HR consulting practice, which provides HR outsourcing solutions and interim HR consulting. In Dallas, vcfo provides an array of human resource consulting services, including human resources compliance, M&A due diligence and strategic HR guidance. For more information or to contact Kelly, please email her firstname.lastname@example.org.
1 From US Department of Labor overtime fact sheet: www.dol.gov/whd/overtime/final2016/overtime-factsheet.htm
2 From US Department of Labor Final Rule: www.dol.gov/whd/overtime/final2016/