Articles Client Alerts / 05.18.2016

Minimum Salary Threshold For Overtime Exemptions Under the Fair Labor Standards Act will Increase in Fourth Quarter 2016.

By: Robert J. Bowes with Melissa Yasinow

On May 18, 2016, the U.S. Department of Labor (“DOL”) announced the imminent publication of a Final Rule to amend the Fair Labor Standards Act (“FLSA”). The Final Rule will increase the minimum salary levels required to satisfy exemptions under the FLSA, and thereby require employers to pay overtime to an additional 4 million workers within the first year of implementation.

Under the FLSA, employers must pay employees overtime at time-and-a-half for hours worked in excess of 40 hours a week. However, employers are not required to pay overtime to “white collar employees” (executive, administrative, and professional employees as defined by the FLSA) or “highly compensated employees.” Under the current rules, an exempt “white collar employee” must perform certain job duties and receive a salary of at least $455 per week or $23,660 per year. Likewise, an exempt “highly compensated employee” must perform certain duties and receive at least $100,000 per year.

On June 30, 2015, the DOL issued proposed rule changes to the FLSA to make more employees eligible for overtime pay. Under the proposed changes, the minimum salary threshold for exempt “white collar employees” would have been raised to $921 per week/$47,892 per year, and the minimum salary threshold for exempt “highly compensated employees” would have been raised to $122,148 per year. The DOL further suggested that the salary threshold for both categories be updated on an annual basis automatically, with the increase tied to either a fixed percentile of wages or the Consumer Price Index. Our July 2015 article on the proposed rule changes can be found here.

The Final Rule goes into effect on December 1, 2016. It amends the minimum salary threshold for exempt employees (but not the duties they must perform under the FLSA to qualify for exemption). Under the Final Rule, an exempt “white collar employee” must receive a fixed salary of at least $913 per week, or $47,476 per year, and an exempt “highly compensated employee” must receive at least $134,004 per year. This minimum salary threshold will automatically update every three (3) years—not annually, as had been stated in the proposed rule—starting on January 1, 2020. This automatic update will maintain the salary threshold for exempt “white collar employees” at the 40th percentile of full-time salaried workers in the lowest-wage Census region, and, for exempt “highly compensated employees,” at the 90th percentile of full-time salaried workers nationally.

The Final Rule also contains provisions not included in the proposed rule. For instance, the Final Rule allows employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to ten percent (10%) of the minimum salary threshold. Examples of these nondiscretionary payments include payments for meeting set production goals, retention bonuses, and commission payments based on a fixed formula. Employers, however, must make these payments on at least a quarterly basis.

Also, under the Final Rule, employers may make a “catch-up” payment at the end of each quarter if an employee doesn’t receive enough in incentive payments to otherwise remain exempt. This “catch-up” payment will count only toward the prior quarter’s salary amount, and not toward the salary amount in which the payment was made. If an employer does not make a “catch-up” payment, then the non-exempt employee is entitled to overtime pay for any overtime hours working during the relevant quarter.

For more information on the Final Rule and its impact on the FLSA’s overtime exemptions, or for any other employment law questions, please contact your KJK attorneys.