New OT Regs About to be Published: Employers to Face a Dramatic Increase in Minimum Salary Requirement for Major Exemptions

The new minimum salary level for the executive, administrative, and professional employee exemptions under the Fair Labor Standards Act (FLSA) will be $913 per week, or $47,476 per year, under final regulations that will be released on Wednesday, May 18, 2016, by the U.S. Department of Labor (DOL). This new salary threshold—which will become effective on December 1, 2016—more than doubles the current minimum salary level of $455 per week, or $23,660 per year, and will have a dramatic impact on employers.

Although this is a huge increase from the current minimum salary level, the new standard actually is lower than the $970 per week figure that had been projected when the DOL’s Wage and Hour Division (WHD) issued its proposed Part 541 regulations in 2015. The WHD had stated in the proposed regulations that it planned to set the new threshold to correspond to the 40^th percentile of weekly earnings for full-time salaried workers in the United States based on statistics maintained by the U.S. Bureau of Labor Statistics (BLS). That proposed approach was the subject of much criticism, including the fact that it did not take into account pay differentials among various regions of the country.

Interestingly, in the final regulations, the WHD tied the new minimum salary level to the 40^th percentile of all salaried employees in the lowest-wage region of the country’s five Census Regions. Those five regions are the Northeast, the Southeast, the Midwest, the Southwest, and the West. Of the five regions, the Southeast currently has the lowest wages.

The new salary requirements will apply to the FLSA’s executive, administrative, and professional exemptions. Employees who do not meet the new salary requirements when the final regulations become effective will no longer qualify for one of these exemptions, which means they will have to be paid overtime compensation when they work more than 40 hours in a workweek.

Other major highlights from the final regulations include the following:

• The minimum salary level will be adjusted every three years to track the 40th percentile of the lowest wage Census Region, whether that is the Southeast or one of the other four Census Regions.
• For the first time, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level, as long as those payments are made on a quarterly or more frequent basis.
• The total compensation requirement to qualify for the highly compensated employee (HCE) exemption will increase from $100,000 per year to $134,004 per year, which is based on the 90th percentile of earnings for full-time salaried workers in the United States, without regard to regional differences.
• The total compensation requirement for the HCE exemption also will be adjusted every three years so that it continues to correspond to the 90th percentile.

 

Notably, the DOL did not make any changes to the duties tests for any of the exemptions.

The DOL will formally release the final regulations on Wednesday, May 18, and they should be published in the Federal Register within a matter of days. The final regulations will become effective on Thursday, December 1, 2016, which means that employers will have approximately six and one-half months to make whatever changes are necessary to comply with the new requirements. This is a longer time period than had been anticipated.

Ogletree Deakins will continue to cover the final regulations in depth on our Wage and Hour blog in addition to the firm’s Overtime Solutions Center, which includes a variety of resources on the overtime rule and is frequently updated.

For a detailed discussion of the new regulations, join us for a one-hour webinar, “The Final Overtime Regulations: What The New Minimum Salary Requirements Mean for Employers,” on Friday, May 20, 2016, at 2:00 p.m. Eastern. Our speakers, Washington, D.C. shareholder Alfred B. Robinson, Jr. and Greenville, S.C. shareholder Charles E. McDonald III, will explain the new overtime regulations, their impact on employers, and what the future may bring. To register for this timely program, click here.