Final Rule Increases Salary Thresholds for FLSA Overtime Exemption

Final Rule Increases Salary Thresholds for FLSA Overtime Exemption

By: Lauren Appel and Daniel Blake

May 19, 2016 - More than two years after announcing their intent to expand overtime for U.S. workers – and 270,000 public comments later – President Obama and Secretary of Labor Perez announced today the issuance of the U.S. Department of Labor’s (DOL) final rule updating the Fair Labor Standards Act’s White Collar Exemptions.  The final rule automatically extends overtime pay eligibility to most salaried white collar workers earning less than $913 per week ($47,476 per year) and will update the salary threshold every three years. Marking the largest expansion of overtime eligibility under federal law since the 1970s, the new rule more than doubles the current standard salary threshold of $455 per week ($23,660 per year). The final rule goes into effect December 1, 2016.

In its press release issued Tuesday night, the DOL cited outdated salary thresholds that failed to keep pace with inflation as a primary motivator for the final rule. Noting that only 7 percent of full-time salaried workers are currently eligible for federal overtime protection, the DOL estimates that the final rule will make an estimated 4.1 million workers newly eligible for overtime, and increase automatic eligibility to 35 percent of all full-time salaried workers. Going forward, the final rule’s periodic increases are designed to ensure wage inflation does not phase out certain workers from the law’s protection.

The DOL also highlighted a number of its other key considerations for revising the White Collar Exemptions, including strengthening overtime protections for salaried workers already entitled to overtime, improving work-life balance, spreading work to more potential employees, and increasing productivity and workers’ health.

Key changes to overtime eligibility under the final rule are as follows:

  • The standard salary threshold will automatically update every three years to match the 40th percentile of full-time salary workers in the lowest wage census region, currently the South.
  • The Highly Compensated Employees (HCE) salary threshold, above which most white collar workers are ineligible for overtime, will increase from $100,000 to $134,000. The HCE threshold will update every three years to match the 90th percentile of full-time salaried workers nationally.
  • The DOL will announce new salary thresholds 150 days before they take effect beginning August 1, 2019, with the first updates taking effect January 1, 2020.
  • Up to 10 percent of the salary threshold for non-HCE employees can be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis.

For employers, who will undoubtedly face difficult staffing choices as a result of the final rule, the DOL suggests the final rule will at least provide clarity by simplifying the overtime eligibility analysis. As many employers are aware, establishing that a worker meets the executive, administrative, or professional exemptions from overtime involves a two-part assessment of (1) whether the worker’s salary is above the threshold set by the DOL; and (2) whether the worker’s duties place them within the categories of workers the DOL intended to exempt from overtime. Under the final rule, many more workers will be overtime-eligible because their salaries fall below the standard threshold, eliminating the need for employers to perform the more difficult “duties” analysis.

While the final rule may clarify who is eligible for overtime, how employers can comply with the new law and still meet their business needs is now a more difficult question. Employers should review all salaried positions to ensure employees are properly classified and determine any necessary changes. Members of LeClairRyan’s Labor and Employment team regularly help businesses comply with FLSA overtime requirements and are equipped to help businesses of all types and sizes ensure they are in compliance with the final rule.