Final Rule: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees under the FLSA

On May 18, 2016, the Department of Labor’s final rule updating the overtime regulations, which will automatically extend overtime pay protections to over 4 million workers within the first year of implementation, was published.

The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:

1. 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 ($913 per week; $47,476 annually for a full-year worker);
2. 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 ($134,004); and
3. 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 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.

Employers should review their current classifications to ensure that employees classified as exempt meet the new salary requirements and, at a minimum, still satisfy the current job duties tests. Employers will need to decide whether to raise the salaries of their lower paid currently exempt employees or reclassify them as “nonexempt” and make them eligible for overtime. Reclassification of employees who work irregular hours or significant overtime during certain times of the year may pose particular challenges.

Employers must begin preparing themselves now, as the Final Rule will undoubtedly result in a substantial increase in non-exempt workers, wage and hour litigation, and compliance related issues.

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*** This post is for informational purposes only, and merely recites the general rules of the road. Lots of legal rules have exceptions, however, and every case is unique.  Never rely solely on a blog post in evaluating your situation — always contact an attorney when your legal rights and obligations are on the line.