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May 9, 2016

Yesterday, the U.S. Department of Labor (“DOL”) issued its final overtime rule (the “Rule”), dramatically increasing the minimum salary threshold required to qualify for the Federal Labor Standards Act’s (the “FLSA”) white collar exemptions, from $23,660 per year to $47,476.  Additionally, the Rule automatically adjusts the required threshold every three years to track the 40th percentile of earnings for full-time salaried workers in the lowest-wage census region.  There was one bit of welcome news for employers. 

The Rule permits employers to count nondiscretionary bonuses, incentives, and commissions toward the threshold, so long as employers pay those amounts on a quarterly or more frequent basis.  The maximum limit for including those bonuses and commissions is 10% of the minimum threshold (i.e., $4,747.60 currently) so the good news is a drop in the bucket when compared to the overall increase.  The Rule is effective December 1, 2016, meaning employers have relatively little time to prepare for the potentially significant impact.

As background, the FLSA generally requires employers to pay overtime wages to most workers that work more than 40 hours per week.  The white collar exemptions to the FLSA, however, provide that employees are not entitled to overtime payments if they are paid a minimum salary (rather than on an hourly basis) to perform administrative, executive, or professional duties.

For many employers, the Rule will be a game-changer.  Doubling the salary threshold for the white collar exemptions means that millions of employees will no longer qualify for that exemption.  Doing nothing will have a very considerable impact on many employers’ payroll costs; therefore, we do not expect employers to stand idly by and pay significantly more overtime. 

Instead, we expect employers to convert salaried employees to hourly employees, limit employees to 40 hours per week by hiring additional workers, or increase their employees’ salaries to the new threshold.  The best strategy for each employer will be dependent on the specific employer and its employee population.  With all of these complexities to deal with, now is the time to start planning for this change, if you have not started already.

If employers opt to convert salaried employees to hourly, they are strongly encouraged to provide detailed training to the impacted employees about recording their hours and to clearly communicate the reasons for reclassification and how the reclassification will impact compensation.  Furthermore, employers should plan on monitoring these employees to ensure that they are properly recording their time, as there will be a learning curve for the converted employees.

Although the Rule will present many challenges to employers, it presents an excellent opportunity to identify positions that may have been misclassified as exempt or vice versa.  In the past reclassifying positions drew suspicion from impacted employees and often led to litigation.  In the wake of the Rule, changes can be attributed to the Rule, mitigating potential liability.