For months, employers have been anxiously awaiting the Department of Labor’s (DOL’s) final rule on exemptions from overtime under the Fair Labor Standards Act (FLSA) and wondering whether the DOL would pass the rule as previously proposed or make modifications to its June 2015 proposed rule. Now the wait is finally over and, as anticipated, the DOL’s final rule (which will be published in the Federal Register today) contains some significant changes for employers with salaried workers. Notably, this rule is only one of many new regulations that the President’s Administration pushed through by May 23, 2016 in order to ensure they take effect before President Obama’s term ends in January 2017. Below are several highlights of the final rule change, along with strategies employers should consider before the rule changes take effect.
What Does The Final Rule Change?
In addition to the increase in the standard salary threshold, the final rule also provides for a significant increase in the minimum salary required to satisfy the highly compensated employee (HCE) exemption. The new salary threshold for highly compensated employees will increase to $134,004 per year (up from $100,000 per year) and corresponds to the 90th percentile of full-time earnings nationwide.
What Has Not Changed?
Impact of the Final Rule
The final rule is expected to have an enormous impact on employers. According to the DOL’s fact sheet on the final rule, it will affect 4.2 million workers in the United States who are currently classified as exempt but earn less than $47,476 per year. The DOL estimates that employers will convert 4.1 million of these workers to hourly status, so they will be eligible for overtime pay, and that 100,000 of these workers will receive salary increases to satisfy the new minimum thresholds. The agency also estimates that, in the first year alone, the final rule will cost private sector employers $1.8 billion – $1.2 billion in payroll increases and $637.7 million in additional direct costs on employers, such as conducting audits on employees’ exempt status and changing management practices to better track the time employees spend working. These costs will be particularly significant for employers in the retail and restaurant industries, which are likely to employ more lower-paid managers.
Compliance Strategies for Employers
In order to assist employers with compliance, the DOL has published several technical guidance documents containing several options for private employers, nonprofits, and higher education. These options include, but are not limited to the following:
Next Steps for Employers
In advance of the December 1 deadline, all employers with salaried workers should audit the exempt status and salaries for their employees to ensure compliance with the DOL’s final rule. Any audit should include a review of salaries to ensure that all exempt workers are paid at least the minimum salary required for exemption under the final rule. In addition, employers should use the final rule as an opportunity to closely analyze the job duties of positions about which there are classification concerns in order to ensure that the job duties for those positions satisfy the requirements of the existing duties tests. Employers will then need to work on raising salaries and/or reclassifying any employees who no longer qualify as exempt either due to the increased salary threshold or because they do not satisfy the applicable duties test. We recommend that employers promptly consult with their employment counsel for assistance complying with the DOL’s final rule.