If you have employees that you consider to be exempt from overtime payments, this update is important for you. The Department of Labor (“DOL”) today released its long-awaited final regulation on overtime exemptions. As expected, the new regulation steeply increases the salary threshold required for an employee to be eligible for exemption from overtime under the Fair Labor Standards Act (“FLSA”). The new threshold is $913.00 per week, or $47,476.00 per year. This means that any employee who makes less than $47,476.00 will no longer be eligible for an exemption, no matter what the duties of his or her job are. While this increase is less than the proposed regulation’s threshold of more than $50,000.00, it is a significant increase from the current threshold of $455.00 per week, or $23,600.00 per year.   The rationale for the number is that it is at the 40th percentile of wages for salaried employees.

 

The final regulation also contains an automatic increase in the salary threshold, which will be made every three years. The increase will equal the 40th percentile of salary in the lowest wage census region. The proposed regulation had contemplated an annual increase, and had indicated that it would either be based on a percentile of salaried employees, or be tied to an index such as the consumer price index. By tying the amount to a percentile of wages of salaried individuals, the DOL has guaranteed that there will be another significant increase, at least in the first three-year period. This is because many employers may change current low-wage salaried individuals into hourly employees, thereby increasing the overall wages for salaried employees.

 

The final regulation also increases the threshold amount for the exemption for highly compensated individuals from $100,000.00 to $134,004.00, which is the 90th percentile of full-time salaried workers. This amount also will be subject to automatic increases in future years. This exemption is unavailing to employers who only have employees in Pennsylvania, because they cannot take advantage of this exemption. Pennsylvania’s Minimum Wage Law does not recognize such an exemption, and the FLSA requires the more restrictive of state or federal law to apply to overtime exemptions.

 

One bright note is that, at least for now, the DOL has not changed the duties test for white-collar exemptions. The proposed regulations had posed a series of questions about the duties test, which many people thought meant that the DOL was planning to revise the duties test as part of the final regulation.

 

Another bright note is that the effective date for the implementation of the final regulation is December 1, 2016. Typically, regulations are effective within sixty days of publication. Here, employer groups had sought more time, given the impact of the changes, and the DOL responded by extending the time employers will have to prepare for implementation.

 

(1)	Salary threshold for all white-collar exemptions will change from $23,600.00 to $47,476.00;
(2)	Salary threshold for highly compensated employees will change from $100,000.00 to $134,004.00;
(3)	Threshold will increase every three years;
(4)	Duties test remains unchanged;
(5)	Final regulation to go into effect on December 1, 2016.

 

 

What Does This Mean For You? While there will be legal challenges to the final rule, employers should prepare for its implementation on December 1, 2016. This rule gives employers a good opportunity to audit current practices. Accordingly, it is a good time to review the job duties of all employees currently considered to be exempt, to see whether: (1) they currently have job duties that fit within the duties portion of a valid exemption; (2) they actually are paid on a salary basis, as defined by the FLSA regulations; and (3) they fall below the new salary threshold.

 

If you find that you have employees who have been misclassified, they should be reclassified as part of your audit. If you have employees who otherwise would be exempt, but will fall below the new salary threshold, you have several options. You may choose to raise their salary to the new threshold level. If you choose this option, keep in mind that you will need to continue to raise their salary, every three years, in conjunction with the new thresholds that will be announced.

 

Another option is to make the salaried individual an hourly employee, paying overtime whenever the individual works more than 40 hours in one week. This will mean that the salaried individual will need to keep track of hours worked, and will need to be retrained not to work off the clock and to record all time worked. If you choose this option, you will want to examine the hourly rate at which you wish to pay the employee. Will the hourly rate simply be the current salary, divided by 2080? Or will it reflect that you expect that the employee will work a specific amount of overtime? In that case, you may want to calculate an hourly rate that, when combined with anticipated overtime payments, will equal the current salary rate.

 

You also may keep an individual in a salaried status, and the DOL’s materials accompanying the final regulation state several times that employers are not required to change salary status for the newly nonexempt employees. However, if you choose to continue to pay on a salary basis, you should speak with your employment counsel. Nonexempt salaried individuals will need to be paid overtime for hours worked over 40 in one week – just like hourly employees – but calculating overtime for employees who are not paid on an hourly basis can be tricky, and such individuals will still need to keep track of their hours so they can be paid overtime.

 

You also will need to make decisions about time worked. Will you allow your newly nonexempt employees to work large amounts of overtime? If not, how will that work be redistributed? One of the biggest issues will be the use of electronic equipment after hours. Exempt employees are used to being able to work at home after hours, and may check and respond to emails, use computers, make phone calls, and take care of other tasks after coming home from work. Most, if not all, of these tasks now will be compensable, and overtime will need to be paid.

 

The final rule will require employers to think about how they distribute work and how they align their workforces. While you have more than six months to do so, now is the time to get started, so that you can have changes in place and employees trained before the implementation takes place.

 

If you have any questions about this or any other employment or labor law issue, please contact Whitney Rahman at (717) 509-7237 or swr@blakingerthomas.com.