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The FLSA exempt final regulations are here

May 18, 2016

Article courtesy of SBAM Approved Partner ASE 
Author: Anthony Kaylin

Last night the U.S. Department of Labor published the final regulations that will adjust the definition of exempt employment for certain white collar positions by raising the salary level below which workers will be non-exempt, i.e., eligible for overtime pay under the Fair Labor Standards Act.

Back on March 13, 2014, President Obama signed a Presidential Memorandum directing the Secretary of Labor to “restore the common sense principles” related to overtime, and directed the Department of Labor (DOL) to review the exempt/nonexempt definitions and update them if necessary. On July 6, 2015, after much delay, the DOL issued proposed new regulations that would significantly change the law governing certain “white collar” workers who are exempt from minimum wage and overtime pay.

The proposed regulations primarily affected the salary basis test. The DOL proposed to increase the standard salary level to qualify for exemption from the FLSA minimum wage and overtime requirements as an Executive, Administrative, or Professional employee from $455 a week ($23,660 a year) to $970 a week, or $50,440 a year. A major reason for such a jump is that the then-current salary level threshold for exemption of $455 per week, or $23,660 annually, was below the poverty threshold for a family of four.

The DOL also asked whether the various exempt duties tests should be reviewed and updated as well. But the new regulations do not provide for any changes to these tests.

Click here for a table that lays out the differences between the proposed regulations and the final regulations.

Most observers did not expect the final regulations to come out until July because there were approximately 280,000 comments submitted on the proposed regulations. However it turned out that the vast majority of the comments were simple statements of support for or opposition to the rules. Only about 3,000 comments were substantive, which shortened the vetting process considerably.

The highlights of the regulations, along with explanatory information, are as follows:

1. The final regulations raise the salary threshold from $23,660 to $47,476 a year, or from $455 to $913 a week. This doubles the current salary threshold while being responsive to public comments regarding regional variations in income by setting the salary threshold at the 40th percentile of full-time salaried workers in the lowest income census region (currently, the South).

2. The regulations raise the “highly compensated employee” (HCE) threshold – from $100,000 to $134,004 (approximately $12,000 higher than originally proposed). According to the DOL, the upper threshold was designed to ease the burden on employers in identifying overtime eligible employees since it is more likely that workers earning above this high salary level perform the types of job duties that would exempt them from overtime requirements.

3. The regulations make no changes to the “duties test.” Workers earning more than the salary threshold are still subject to the current duties test to determine eligibility for overtime.

4. The regulations provide that bonuses and incentive payments will count toward up to 10% of the new salary level.

5. The regulations require that the salary threshold be updated every three years. The updates are designed to ensure that the threshold is maintained at the 40th percentile of full-time salaried workers in the lowest income region of the country. Based on projections of wage growth, the threshold is expected to rise to more than $51,000 with the first update on January 1, 2020.

The DOL believes that the regulations will raise American worker wages by an estimated $12 billion over the next 10 years, with an average increase of $1.2 billion annually. For the time being the DOL also believes that employers will retain considerable flexibility in how they comply with the new rule, such as increasing salaries to at least the new threshold to keep positions that are primarily Executive, Administrative, or Professional exempt from overtime pay; or paying overtime for hours worked in excess of 40 in a week; or reducing overtime hours.

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.

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