On May 18, 2016 the long-awaited FLSA Final Overtime Rule was issued after months of anticipation. This Final Rule is expected to impact over four million workers in the first year alone. According to the Department of Labor (DOL) this Final Rule could help give a “meaningful boost to many workers’ wallets, and will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work”.
Under the Final Rule, many employees who were previously exempt under the Executive, Administrative and Professional (“EAP”) white-collar FLSA exemptions will now have to be re-classified as non-exempt because they will no longer meet the salary level threshold necessary to be exempt. These employees will now be entitled to overtime as non-exempt employees. The white collar exemptions require the application of a three-part test including that (1) the employee be compensated on a salary basis, (2) that the employee be compensated at the requisite salary level which will now require that they be compensated at the rate of not less than $913 or $47,476 annually which is based on a salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, and (3) that they meet the “duties test” for the EAP white-collar FLSA exemptions.
Another white-collar exemption is for the highly-compensated employee. The salary level threshold for this exemption was also raised by the new Final Rule from the old requirement of $100,000 to the new requirement of that the person be making $134,004 per year. To be exempt, the employee in addition to making this amount, has to be paid at least $455 on a salary basis and must meet at least one of the other duties under the duties tests for EAP white-collar exemptions.
Another issued addressed in this FLSA Final Rule for Overtime is that the DOL did not want to have to go through this rule-making process each and every time they want to increase these salary level thresholds. Therefore, they instituted a mechanism whereby every three years the salary level thresholds will be automatically updated to maintain the levels at these percentiles. Employers should be aware that although the DOL had requested public comment as to whether the “duties test” should be changed to one similar to that of California in which at least 50% of the employee’s time had to be spent performing their primary duty, the Final Rule makes no changes to the “duties test”. One more additional change under the Final Rule is that employers can now include nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
Employers clearly have a choice in deciding how to ensure compliance with this new Final Rule. They can either re-classify all employees who make more than $455 per week but less than $913 a week to be non-exempt employees and pay them overtime or choose to raise an employee's salary to above the $47,476 annual salary level requirement so that these workers can continue to be treated as exempt employees who are not entitled to be paid overtime.
Employers should be aware that if they decide to re-classify these previously exempt employees to non-exempt employees there may be a significant amount of ill-will with these employees. Being re-classified as a non-exempt employee can be perceived as a demotion and also will now require these employees who previously did not have to keep track of their time, to record their time or punch a time-clock to comply with the FLSA timekeeping requirements. Employees could resent this and although they will now be entitled to overtime, that may not be enough to make up for the change in status they perceive as a result of being re-classified. These rules will not be effective until December 1, 2016 so employers have a little time to deal with these issues but they should begin deciding how to handle this issue sooner rather than later. One thing is for sure. Employers may soon be paying overtime to many more workers who were previously exempt and not entitled to overtime pay.