Labor & Employment Alert: White Collar Exemptions: DOL Issues Final Rule

May 18, 2016

The Department of Labor will issue its final rule today on overtime exemptions for executive, administrative, and professional employees under the Fair Labor Standards Act.  It will take effect December 1.  Below is an overview, and we will have more detailed analysis after the rule issues.  This is a major event that will have a significant impact on the management of the workplace, and we stand ready to help you prepare for it.

Primary Changes.  The new rule will make two primary changes:  (1) increase the salary threshold for the standard White Collar Exemptions (from $23,660 to $47,476), and the Highly Compensated Employee Exemption (HCE) (from $100,000 to $134,004); and (2) establish a process for updating the thresholds automatically every three years.

Effective Date.  Many employers pressed the DOL to allow a phased-in schedule for initial compliance, some suggesting several years.  The DOL could have allowed no grace period, in which case it would be effective in July (60 days after publication).  The final rule gives a little by allowing most employers until December 1 to comply, and allows certain small providers of Medicaid-funded services to wait until 2019.

Automatic Updates.  The automatic updates to the salary threshold will occur every three years, rather than the proposed annual adjustments.  The initial threshold will not change until January 2020, and thereafter in 2023, and so forth.  The agency will publish the new thresholds 150 days in advance of each new adjustment date.  This is viewed as a significant improvement over the annual adjustments that had been proposed.

Salary Threshold.  The updated salary thres-hold will be at the 40th percentile for full-time salaried workers in the lowest-wage census region (currently the South), while the HCE Exemption will be at the 90th percentile nationally.  The concession here is to use the “lowest-wage Census region” for the salary threshold, rather than the national census data DOL had proposed, and this accounts for the drop in the initial threshold from what had been expected.  DOL did not make this concession for the HCE Exemption, and will stick with the national census data for setting the automatic updates to that threshold.

Incentive Compensation.  Employers may include non-discretionary bonuses, incentive pay, and commissions in calculating whether an employee meets the salary threshold—up to ten percent of the threshold ($4,747).  The incentive must be paid on a quarterly or more frequent basis to be used for this purpose.  Hence, the employer may set an employee’s base salary at $42,729 and still meet the salary threshold for these exemp-tions.  DOL did not include this in its proposal, but asked for public comments, and has reversed course to allow it.

Catch-up Payments.  In the most unexpected concession, the final rule will allow employers using the bonus option to make quarterly “catch-up” payments for employees whose incentive pay unexpectedly did not bring them up to the required salary threshold for that quarter.  This concept was in the proposal for the HCE Exemption, but DOL previously “ruled out” this possibility for the salary threshold.  Hence, this represents a com-plete reversal of the agency’s position.

Duties Tests.  The DOL did not include a change in the duties tests for these exemptions in its proposed rule, but suggested it might be in the final rule, and solicited public comments on the idea—which some interpreted as an open door.  The most likely change would have been to impose a percentage threshold for determining an employee’s “primary duty,” akin to the California rule.  The final rule omits such changes.

Cautionary Note.  Many employers will have employees who do not meet the new threshold, but still want to use a salary basis for predictability.  The FLSA allows that, and there are several ways to do it, but employers still must pay minimum wage, track employee hours, and pay overtime because these employees will be nonexempt.

This alert is intended to keep readers current on matters affecting Labor & Employment law, and is not intended to be legal advice. If you have any questions, please contact a member of Eckert Seamans’ Labor & Employment team, or the Eckert Seamans lawyer with whom you have been working.

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