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USDOL Posts Final Rule Updating Federal Overtime Standards

May 18, 2016


Summary

On May 18, 2016, the U.S. Department of Labor (“USDOL”) posted a Final Rule expanding federal overtime pay protections by raising the minimum salary requirement to qualify for the white collar exemptions under the Fair Labor Standards Act, 29 U.S.C. §§ 201 et seq. (“FLSA”).  The Final Rule will be published in the Federal Register on May 23, 2016.   Although the Final Rule follows the prior Notice of Proposed Rulemaking dated June 30, 2015 (“NPRM”) in broad outline there are some key differences.   

  • The Final Rule will become effective on December 1, 2016.
  • The Final Rule raises the salary test for the white collar exemptions to a weekly salary basis of $913, a biweekly salary basis of $1,826, a semimonthly salary basis of $1,978, or a monthly salary basis of $3,956.  Guidance accompanying the Final Rule provides for a yearly salary of $47,476.
  • Up to 10% of this salary basis test can be satisfied by the payment of nondiscretionary bonuses, incentives, and commissions, that are paid quarterly or more frequently.  The Final Rule also allows for “catch up” payments at the end of a quarter, subject to certain limitations.
  • The Final Rule raises the compensation test for highly compensated employees to total yearly compensation of $134,004. 
  • The Final Rule also provides an elevator mechanism that will adjust the salary basis every three years starting on January 1, 2020.  At those times, the salary basis will be adjusted to equal the 40th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region, except in the case of the highly compensated employee exemption, in which total annual compensation must equal the annualized earnings amount of the 90th percentile of full-time nonhourly workers nationally.
  • There were no changes made to the duties test.

Discussion

By way of background, the FLSA provides for overtime pay to non-exempt employees at a rate of not less than 150% of the employee’s regular rate for hours worked over 40 in a workweek. Certain executive, administrative, and professional employees are exempt from these protections if they meet both a salary test and a duty test (the “EAP” exemptions).  Current USDOL regulations set the salary threshold for the white collar overtime pay exemptions to $455 per week and there is no automatic updating of this value.  The Final Rule raises the EAP salary basis to a rate per week of not less than the 40th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region (as published by the Bureau of Labor Statistics (“BLS”)).  As noted above, this rate will be $913 per week effective December 1, 2016, and the amount will be adjusted every three years starting on January 1, 2020, using BLS data from the second quarter of the year preceding the update.

Similarly, the salary test for highly compensated employees (“HCEs”) will be raised to $134,004 from $100,000 effective December 1, 2016.  This rate will also be adjusted, starting on January 1, 2020, and every three years thereafter, to equal the annualized earnings amount of the 90th percentile of full-time nonhourly workers nationally. 

Although the NPRM solicited questions about the possible changes to the duties test, the Final Rule leaves the duties test untouched.  Based on the significant discussion in the analysis accompanying the Final Rule, it appears that the USDOL believed that increasing the salary basis test would undo changes made to the regulations by the Bush Administration in 2004, which the current USDOL believes “paired a duties test closely based on the less-stringent short duties test with a salary level derived from the lower long test salary level.”  By increasing the salary basis test, the USDOL paired a higher salary test with the “less stringent” duties test, thereby normalizing the overall test without changing the duties test.  It is also clear from the USDOL’s analysis that it takes the position that by increasing the salary basis test, it actually makes it more likely than an employee will pass the duties test.  In other words, the “premise behind the standard salary level test and the HCE total annual compensation requirement is that employers are more likely to pay higher salaries to workers in bona fide EAP jobs.”  Accordingly, a “high salary is considered a measure of an employer’s good faith in classifying an employee as exempt, because an employer is less likely to have misclassified a worker as exempt if he or she is paid a high wage.”   

Lastly, the Final Rule implements a new concept to the salary basis test.  For the first time, employers will be able to satisfy a maximum of 10% of the salary basis test through “the payment of nondiscretionary bonuses, incentives, and commissions, that are paid quarterly or more frequently” (emphasis added).  In other words, an employer may pay an EAP employee a salary of up to 10% less than that required by the test, so long as non-discretionary payments that are made at least quarterly make up the balance.  In addition, if in each quarter the employee is not receiving sufficient payments to make up the balance (perhaps sales are less than forecast, impacting commissions), then the employer can make a catch-up payment no later than the first pay period of the following quarter.  It will be important for employer to not confuse this catch-up payment with the catch-up payment under the HCE exemption (the latter can account for a broader percentage of compensation, is not limited to non-discretionary payments, and can be made annually). 

By the USDOL’s own estimates, the increased salary basis test will result in depriving 4.2 million employees of exempt status.  Keep in mind that state law tests will also need to be considered when making changes to compensation structures and exempt status.  Employers in California, in particular, should approach the Final Rule with caution because it represents the first time in recent history where the federal salary basis test will be higher than the state salary basis test.

If you have any questions regarding the Final Rule or how it may impact your company’s policies or practices, please contact the authors of this alert or your OMM advisor.


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Apalla Chopra, an O'Melveny partner licensed to practice law in California, Adam KohSweeney, an O'Melveny partner licensed to practice law in California and New York, Adam Karr, an O'Melveny partner licensed to practice law in California, and Jeffrey Kohn, an O'Melveny partner licensed to practice law in New Jersey and New York contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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