Today, the United States Department of Labor (DOL) announced its long-awaited Final Rule. The new regulation redefines American workers who are exempt from the minimum wage and overtime provisions of the Fair Labor Standards Act. Previously, the exemption applied to executive, administrative, and professional (EAP) employees who earned an annual salary of $23,660 (or $455 weekly). The Final Rule more than doubles this salary threshold to $47,476 (or $913 weekly), beginning December 1, 2016. The DOL has also modified the way this salary is calculated. An estimated 4.2 million workers will become eligible for overtime upon the effective date.
The Exemption Salary Threshold
The DOL now determines the salary threshold of the EAP overtime exemption using the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region. At this time, the Region with the lowest wages is the South, where the 40th percentile of earnings is $913 per week.
The Final Rule was drafted in response to criticism that the salary threshold was outdated, as it was last updated in 2004. To ensure the threshold remains current, it will update itself automatically every three years, beginning January 1, 2020.
Non-Discretionary Bonuses and Incentive Payments
The current calculation of an employee’s salary for the purpose of the overtime exemption does not include bonuses or commissions. Any payment that is based on the quality or quantity of an employee’s work, or is discretionary, does not count as salary.
Under the Final Rule, non-discretionary bonuses and incentives may compose up to 10% of an employee’s salary to satisfy the threshold. This means a bonus or commission based upon sales, performance, or profitability will count as salary, but not a bonus contingent upon the decision of the employer to pay it. Bonuses and incentive payments must be paid on a quarterly or more frequent basis to be included in the calculation.
Highly Compensated Employees
The standard EAP exemption test requires that an employee’s primary duties be executive, administrative, or professional, as defined by the DOL. The highly compensated employee (HCE) exemption merely requires that the employee perform an EAP duty regularly or customarily and that the primary duty is office or non-manual work. The standard EAP and HCE exemptions have two different salary thresholds.
Currently, an employee may qualify for the HCE exemption only if his or her annual salary is at least $100,000. The Final Rule recalculated the threshold by using the 90th percentile of earnings of full-time salaried workers across the nation. Therefore, the threshold will increase to $134,004 beginning December 1.
How Employers Are Affected
Employers should assume that the Final Rule will become effective as scheduled on December 1, 2016. All forms of compensation to employees should be analyzed to determine which salaried employees that are currently exempt from overtime will lose the exemption. Several states already have salary thresholds higher than that of the federal rules. In New York, for example, the EAP exemption applies to all employees earning at least $675 per week. This means the focus of New York employers should be on employees earning between $675 and $913 weekly ($35,100 to $47,476 annually) as these employees will soon qualify for overtime payments. Employers should further assess which bonuses, commissions, or incentive payments currently paid to employees may count toward the EAP salary threshold. Only a maximum of $91.30 ($4,748 annually) may be credited toward salary.