The update significantly increases the salary level needed to qualify as exempt under the FLSA’s white collar and highly compensated exemptions.
On May 18, the US Department of Labor (DOL) announced the highly anticipated revisions to the rules interpreting the Fair Labor Standards Act’s (FLSA’s) “white collar” overtime exemptions (Final Rule). The DOL’s Final Rule sets forth four key changes to the current exemption test. As discussed in more detail below, the Final Rule
The Final Rule does not make changes to the duties tests for the white collar exemptions. The changes announced in the Final Rule are effective December 1, 2016.
The FLSA regulations were last updated in 2004. In March 2014, US President Barack Obama directed US Secretary of Labor Thomas E. Perez to “modernize and streamline” the DOL’s white collar exemption regulations. On June 30, 2015, the DOL released proposed regulations and a request for comments on a variety of issues. The proposed rule was published in the Federal Register on July 6, 2015, and the comment period closed on September 4, 2015. On May 18, 2016, the DOL issued its Final Rule.
As noted above, the Final Rule makes four key changes to the current FLSA regulations:
As stated above, the Final Rule makes no changes to the duties tests.
The effective date of the changes in the Final Rule is December 1, 2016. Future automatic updates to threshold amounts will occur every three years beginning on January 1, 2020.
The significant increase in the salary basis level for the white collar exemptions will require employers to quickly identify and evaluate positions compensated below the new threshold and decide whether to reclassify employees or raise their salaries. In making this determination, employers should look at the hours worked for those employees under the salary threshold to estimate the potential cost of paying overtime.
For those employees who will be reclassified, employers should prepare talking points for managers and employees about the change, the reason for the change, and how the change will impact their compensation, benefits, and opportunities for advancement. Additionally, employers should develop training and robust time reporting policies for reclassified workers who will not be accustomed to recording hours worked.
To the extent that reclassified employees previously were receiving bonuses, commissions, or other incentive compensation, employers will need to rethink those forms of compensation or carefully evaluate how to factor them into the regular rate of now-hourly workers. Employers should also be prepared to follow up and audit timekeeping practices for newly reclassified employees to ensure that they are following proper processes and procedures. In addition, it is important for employers to remember to comply with state wage and hour laws for the newly reclassified employees.
On May 26, 2016, at 2:00 pm Eastern, Morgan Lewis will be hosting a one-hour webinar to discuss the new regulations and to address what employers should do in light of the changes, including consideration of compensation plan options and communications strategy in the event of a reclassification. Register for the webinar.
Additionally, if you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Lisa Stephanian Burton
Sari M. Alamuddin
Ronald E. Manthey
John S. Battenfeld
Anne Marie Estevez
Christopher K. Ramsey
Russell R. Bruch