On May 23, 2016, the U.S. Department of Labor (DOL) formally issued the much-anticipated changes to the Fair Labor Standards Act’s overtime regulations and, in particular, the updated white collar exemption’s salary level test. The new rules take effect on December 1, 2016.
Slightly lower than the department’s original proposal, the salary threshold was still doubled for executive, administrative, and professional exemptions — moving from $23,660 to $47,476 a year, or from $455 to $913 a week. As expected, the existing duties test for the executive, administrative, and professional exemptions remains unchanged.
The new salary threshold is based on the 40th percentile of full-time salaried workers in the lowest income region in the country (currently, the South). To ensure the salary threshold is maintained at this 40th percentile, the new rule mandates an update to the salary threshold every three years. The threshold may rise to more than $51,000 with the first update on January 1, 2020.
The new rules also raise the salary threshold for the highly compensated employee exemption from $100,000 to $134,004.
In the face of this daunting new rule, there is one employer-friendly change — the salary basis test was amended to allow employers, for the first time, to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold.
To credit nondiscretionary bonuses and incentive payments, the new rule requires the payments be paid on a quarterly or more frequent basis. In other words, each pay period an employer must pay the exempt employee on a salary basis at least 90 percent of the requisite salary threshold. Do note, however, that the use of nondiscretionary bonuses and/or incentive payments cannot make up the requisite salary threshold for highly compensated employees.
The DOL estimates the new rules will affect 4.2 million workers nationwide. This includes more than 370,000 workers in Texas, 330,000 workers in Florida, 100,000 workers in Tennessee, 66,000 workers in South Carolina, 60,000 workers in both Louisiana and Alabama, and 39,000 workers in Mississippi.
Likewise, the new rules will affect employers across a substantial number of industries.
Many nonprofit organizations are expressing concern. During the comment period after the DOL’s proposed rules, many nonprofit organizations expressed concern that “they are constrained in their ability to increase salaries for their staff because funders evaluate them based on their ability to keep overhead, including salary costs, low, or because the terms of their grants may strictly limit how much of the grant can be allocated for overhead.” For those reasons, nonprofit organizations requested the DOL implement special relief from the new rules. But the DOL did not. The DOL noted that the white collar exemption has never had special rules for nonprofit organizations and relied on a study from the National Compensation Survey that showed the average hourly wage of full-time management employees in the not-for-profit sector exceeds the new rule’s required salary level.
However, approximately 39 percent of the affected employees work more than 40 hours per week. More than that, many nonprofit organizations operate with budget years ending on June 30; thus, these organizations must immediately consider the increased salary level and develop new budgets for the next fiscal year.
According to the DOL, America is getting a raise. In reality, many businesses may not be able to afford the costly impact.
For example, the National Retail Federation estimates that the new rules will cost retail and restaurant businesses $745 million. Thus, businesses will be forced to eliminate manager/assistant manager positions, scrupulously monitor overtime, switch to part-time labor, and/or increase the price of goods to help absorb the added costs. For those businesses that cannot afford to pay these (now) non-exempt employees overtime pay and/or raise employees’ salaries to maintain the exemption, they should consider reorganizing workloads, adjusting employees’ schedules and/or spreading work hours among employees.
With the new rules effective December 1, employers now have approximately six months to prepare and avoid misclassifications of these employees.
We recommend employers:
• Conduct an internal audit with the assistance of qualified counsel of all the positions within your organization and identify all current employees classified as exempt with an annual salary below $47,476.
• Develop the proper strategy for (A) presenting a tailored message to all employees (whether affected or unaffected), (B) managing employees’ conversions to nonexempt status and/or continued exempt status, and (C) implementing comprehensive policies regarding nonexempt employees’ hours.
These strategies are crucial to avoid potential litigation later.
The White Collar Exemption
Unchanged under the new rules, Section 13(a)(1) of the FLSA provides the “white collar exemption” that exempts from these minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional capacity.” An employer may utilize the white collar exemption if the employee meets the salary basis test, salary level test and duties test:
• Salary Basis Test: The employee is paid a predetermined and fixed salary that is not subject to reduction.
• Salary Level Test: The employee’s salary meets the minimum specified amount.
• Duties Test: The employee’s job duties primarily involve executive, administrative or professional duties.
What Industries Will Be Hardest Hit?
The Economic Policy Institute reported that the industries facing the biggest impact – in terms of the greatest share of salaried workers in the industry who will be affected by the new rules – include the following:
• Agriculture, Forestry, Fishing, and Hunting (39.7 percent)
• Leisure and Hospitality (37.3 percent)
• Construction (32.6 percent) and
• Public Administration (32.5 percent)
Brooke Duncan III is a partner at Adams and Reese LLP and member of the firm’s Labor and Employment Practice Team. Duncan joined the firm in 1992 and was instrumental in helping build the firm’s well-established Labor and Employment practice.
Kate Brownlee is an associate at Adams and Reese LLP and member of the firm’s Labor and Employment Practice Team. Brownlee joined the firm in 2013 after receiving her J.D. from Loyola University New Orleans College of Law.
