On May 18, 2016 the United States Department of Labor (DOL) issued its Final Rule updating the Fair Labor Standards Act (FLSA) overtime regulations regarding the executive, administrative and professional exemptions (white collar exemptions) under Section 13(a)(1). The rules will become effective on December 1, 2016.

What The Final Rule Changed

• The DOL set the minimum salary level for FLSA White Collar Exemptions at $913 per week ($47,476 annualized)—up from the current $455 per week ($23,660 annualized), but down from the proposed $970 per week ($50,440 annualized);
• The DOL set the total compensation level for highly compensated employees (HCE) at $134,004 annually—up from the current $100,000;
• The DOL provided for automatic increases in the salary levels every three years (beginning January 1, 2020)—with the minimum salary level indexed to the 40th percentile of salaries for full-time workers in the lowest wage census region (currently the south region), and the HCE level indexed to the 90th percentile of salaries for national full-time salary workers; and 
• The DOL permitted employers to satisfy up to 10% of the new salary threshold through nondiscretionary bonuses and other incentive payments, including commissions, provided that payments are made at least quarterly.

What The Final Rule Left Unchanged

• The DOL did not make any changes to duties test, i.e. the kinds or amounts of work necessary to sustain exempt status
• The DOL did not eliminate the “concurrent duties” test currently in place for the FLSA White Collar Exemptions

What To Do Now

• Identify currently exempt jobs with salaries that fall below the proposed new salary threshold for exempt employees, using $913 per week, or $47,476 per year.
• Determine which employees close to the new threshold will get bumped up to maintain exempt status, or whether the approach will be to reclassify as nonexempt all employees whose current salary is below the new minimum.
• For employees who probably will be reclassified as nonexempt, understand now how many hours they are working per week so employers can model pay going forward with reasonable accuracy.
• Determine what approach to take in setting nonexempt pay rates.
• For employees subject to the highly compensated standard but below its new proposed pay level—that is, between $100,000 and $134,004 per year—determine whether those jobs satisfy the full duties test of one or more exemptions, as opposed to the relaxed duties standard applicable for highly compensated employees.
• Consider whether to reclassify other positions at this time to manage risk and enhance compliance

Golden State Impact

• The new DOL standard of $47,476 per year is higher than California’s current overtime exemption threshold of $41,600 per year. Because the federal level is higher, California will need to follow it to determine which employees are eligible for overtime pay.
• California employers will need to continue to apply the duties test when categorizing employees. This means in addition to the new salary threshold executive employees in California must continue to engage in exempt tasks at least 51% of the time.
• California employers remain subject to California laws when more favorable to employees. This means California employees can continue to earn overtime for over 8 hours in a day and over 40 hours in a week.

The DOL has released a number of resources to accompany its announcement:

• Fact sheet 
• Frequently asked questions
• Guides for small businesses, non-profits, higher education, and state and local governments
• Technical guidance for private employers, non-profits, and higher education

Additional Information

We will continue to provide further updates as the Final Rule is analyzed. In the interim, please contact your Kutak Rock attorney or the author of this alert.