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Labor & Employment Alert >> Employers Face Significant Increase in Required Salary Level for Overtime-Exempt Employees

May 19, 2016

The U.S. Department of Labor (DOL) recently issued its Final Rule addressing the minimum salary requirements for employees who are classified as exempt from overtime pay.

Under the Fair Labor Standards Act (FLSA), employees who are exempt from overtime under the commonly utilized executive, administrative and professional exemptions must: (1) be paid a predetermined and fixed salary that cannot be reduced based on variations in the quantity or quality of work performed; (2) be paid at a specified minimum salary level; and (3) perform primarily executive, administrative or professional duties, as defined in the FLSA regulations.

New Salary Requirement Represents Major Increase
Beginning on December 1, 2016, full-time salaried workers in the executive, administrative and professional categories must be paid at least $913 per week, which is equivalent to $47,476 per year, to remain exempt from overtime pay requirements. This is a major increase from the federal salary level of $455 per week that was last updated in 2004.

According to the DOL, the new salary requirement represents the agency’s view of the most appropriate line of demarcation between employees who should be protected with overtime pay when they work more than 40 hours per week, and those who earn compensation at a high enough level that they may be considered exempt from overtime.

Under the Final Rule, up to 10 percent of the minimum salary level can come from non-discretionary bonuses and incentive payments (including commissions). Examples of these types of payments include non-discretionary incentive bonuses that are linked to productivity and profitability. Employers that use non-discretionary payments to meet the $913 per week standard salary requirement must make these payments to employees on a quarterly or more frequent basis.

Minimum Salary Level Rises For Highly Compensated Employee Exemption
For workers who are classified as exempt under the FLSA’s highly compensated employee category, which permits a less rigorous job duties test, the minimum salary level will rise from $100,000 to $134,004 per year. Employers utilizing the highly compensated employee exemption are permitted to use non-discretionary bonuses and incentive payments to satisfy the requisite level of annual pay. Employees in this category may also receive a “catch-up” payment during the final pay period or within one month after the end of the year.

In order to ensure that the salary requirement continues to be a meaningful test for identifying employees who are entitled to overtime protection, the Final Rule provides for automatic updates every three years.

Job Duties Tests
Even after receiving more than 270,000 comments, the DOL ultimately did not make any changes to the job duties tests for employees in the executive, administrative and professional exemption categories. The DOL’s website has useful Fact Sheets that summarize the duties tests for employees who are classified under these exemptions, which can be found here: https://webapps.dol.gov/elaws/whd/flsa/overtime/menu.htm

Under the FLSA, unless employees satisfy both a job duties test and minimum compensation requirements, they are eligible for overtime pay.

The Bottom Line

Before December 1, 2016, employers should evaluate the impact of the Final Rule by identifying employees who currently earn less than $47,476 per year. For employees who are classified as exempt and meet job duties requirements, and who will be impacted by the increased salary level, employers may consider increasing their salaries to retain exempt status. Moreover, some employees may need to be converted to non-exempt, overtime-eligible status, and employers will be required to pay overtime for workweeks of more than 40 hours. Employers should also analyze and consider hours worked by impacted employees to help assess expected overtime costs, and if overtime hours for certain personnel may need to be reduced or eliminated.


Labor & Employment