New Department of Labor Overtime Rules Will Take Effect on December 1, 2016

Effective December 1, 2016, employers must comply with the U.S. Department of Labor’s (“DOL”) updated regulations regarding the executive, administrative, and professional exemptions to the overtime requirements in the Fair Labor Standards Act. (“FLSA”).  These new regulations significantly increase the minimum salary that employers must pay employees in order to classify them as exempt from overtime.

A.        Background Regarding the Current Executive, Administrative, and Professional Exemptions

The FLSA requires that most employees in the United States (1) be paid at least the federal minimum wage for all time worked, and (2) receive overtime pay at 1.5 times the regular rate of pay for all time worked in excess of 40 hours in a workweek.  Certain exemptions, however, exist to this requirement.  One category of exemptions is the exemption for individuals employed in an executive, administrative or professional capacity (i.e., the “white-collar” exemptions).  To qualify for one of these exemptions, an individual must generally:

1. be paid on a salaried basis, meaning that he or she is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed;[1]
2. be paid at a specified weekly salary level (or more), currently set at $455 per week (exclusive of board, lodging or other facilities)[2]; and
3. primarily perform executive, administrative, or professional duties, as defined in the DOL’s regulations.  

The DOL’s regulations also contain a special rule for “highly-compensated” employees.  An individual will be exempt from the FLSA’s minimum wage and overtime requirements under this rule if:

• he or she earns total annual compensation of $100,000 or more (exclusive of board, lodging or other facilities), which includes at least $455 per week paid on a salary basis;
• his or her primary duty includes performing office or non-manual work; and
• he or she customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.

Additionally, with respect to employees in the motion picture producing industry, the DOL’s regulations currently provide that the requirement that an exempt employee be paid “on a salary basis” does not apply to an employee in the motion picture producing industry who is compensated at a base rate of at least $695 a week (exclusive of board, lodging, or other facilities).  This means that an employee in this industry who meets either the executive, administrative or professional duties tests, and who is employed at the specified base rate (or higher) is exempt if he or she is paid a proportionate amount (based on a week of not more than 6 days) for any week in which the employee does not work a full workweek for any reason.  Moreover, an otherwise exempt employee in this industry qualifies for the exemption if the employee is employed at a daily rate under the following circumstances: (i) the employee is in a job category for which a weekly base rate is not provided and the daily base rate would yield at least $695 if 6 days were worked; or (ii) the employee is in a job category having a weekly base rate of at least $695 and the daily base rate is at least one-sixth of such weekly base rate.

B.        New Requirements Under the DOL’s Updated Regulations

The DOL’s updated regulations: (1) increase the minimum salary requirements to meet the executive, administrative and professional exemptions, as well as the highly-compensated employee exemption; (2) allow employers to apply a portion of the employees’ non-discretionary bonus and incentive payments to meet these new salary requirements; and (3) with respect to employees in the motion picture producing industry, raise the special base rate that must be paid to meet the special exemption for these employees.  Notably, the regulations do not modify the duties that must be performed by an employee in order for the employee to be classified as exempt from overtime.

1. Increased Minimum Salary Requirements.  The DOL’s updated regulations:  

a. Set the weekly salary level at a rate not less than the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South).  Effective December 1, 2016, this will increase the minimum weekly salary requirement to $913 per week or $47,476 annually for a full-year worker.

b. Set the total annual compensation requirement for highly compensated employees to the annual equivalent of the 90th percentile of full-time salaried workers nationally.  Effective December 1, 2016, this will increase the salary requirement for highly compensated employees to $134,004 per year (which includes at least $913 per week paid on a salary basis).  

c. Establish a mechanism for automatically updating the required salary and compensation levels every three years to maintain the levels at the above percentiles.  

2. Employers’ Ability to Apply Non-Discretionary Bonuses and Incentive Payments to Meet the New Salary Requirements. 

a. Weekly Salary Levels for the Executive, Administrative and Professional Exemptions:  Under the new rules, employers: (i) may use nondiscretionary bonuses and incentive payments (including commissions) paid to an employee to satisfy up to 10% of the new weekly salary level[3]; provided (ii) such payments are paid on a quarterly or more frequent basis.  If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given quarter to retain his or her exempt status, the employer may make a “catch-up” payment to the employee at the end of the quarter to make up for the shortfall (i.e., a payment up to 10% of the required salary level for the preceding 13-week period).  The catch-up payment must be made within one pay period of the end of the quarter, and will count only toward the prior quarter’s salary amount (and not toward the salary amount in the quarter in which it was paid).  If the employer chooses not to make the catch-up payment for a particular quarter, the employee would be entitled to overtime pay for any overtime hours worked during the quarter.

b. Salary Necessary to Satisfy the Highly-Compensated Employee Exemption:  To claim the highly-compensated employee exemption: (i) an employer must pay the employee at least the standard weekly salary of $913 per week on a salary basis; and (ii) the remainder of the employee’s total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation.  If an employee’s total compensation in a given annual period fails to meet the new $134,004 salary threshold for the highly compensated employee exemption, an employer may make a “catch-up” payment during the last pay period of the annual period or within one month of the end of the annual period.  Any catch-up payment made after the end of the annual period will count only toward the prior year’s total annual compensation and not toward the annual compensation requirement for the year it was paid.  If such a catch-up payment is not made within the timeframe allotted, the employee will not qualify for the highly compensated employee exemption, but may still qualify as exempt under one of the other white collar exemptions.

3. Increase in the Special Base Rate for Employees in the Motion Picture Producing Industry.

The updated regulations increase the special base rate for employees in the motion picture producing industry (see Section A above) to $1,397 per week, effective December 1, 2016 (exclusive of board, lodging or other facilities).  Additionally, beginning on January 1, 2020, and every three years thereafter, these employees must be compensated at a base rate of at least the previously applicable base rate adjusted by the same ratio as the preceding standard salary level is increased (exclusive of board, lodging, or other facilities).

C.        Next Steps

Prior to December 1, 2016, employers should review the salaries currently paid to employees that they have classified as exempt under the executive, administrative and professional exemptions, and the highly-compensated employee exemption.  Employers must determine whether: (1) these salaries will satisfy the increased salary requirements under the DOL’s updated regulations; or (2) these salaries, together with the non-discretionary bonus and incentive payments described above will satisfy the new salary requirements.  (For motion picture producing industry employers, a similar analysis should be performed with respect to the special base rate paid to employees, if the employer is utilizing this exemption.) 

If an exempt employee’s compensation will not satisfy the new requirements in the regulations for exempt status, the employer:  

• may convert the exempt employee to a non-exempt employee and pay the employee overtime for all time worked in excess of 40 hours per week (or limit the employee’s hours to 40 hours per week to avoid paying overtime); or
• increase the employee’s salary (or non-discretionary bonus or incentive payment opportunities, if applicable), to satisfy the new salary requirements. 

Employers must also be mindful of any state wage and hour laws that impose more stringent requirements for an employee to be exempt from overtime, and ensure that they comply with their obligations under these laws.

Please do not hesitate to contact any of our attorneys if you have any questions regarding the DOL’s updated regulations or the steps that your company must take to comply with the new regulations by December 1, 2016.

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[1] Under the administrative and professional exemptions, employees may also be paid on a fee basis (in accordance with the regulations).

[2] Under these exemptions, certain employees are not subject to either the salary basis or salary level tests (e.g., doctors, teachers, and lawyers).

[3] Nondiscretionary bonuses and incentive payments (including commissions) are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company.  Examples include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula.