The Department of Labor (DOL) has released its final rule to update the regulations defining the exemption for administrative, executive, and professional employees (also referred to as the white collar exemptions). The finalized overtime exemption rule is expected to affect over 4 million salaried employees. Employers will be given six (6) months to make the necessary changes to ensure compliance with the new rule, which takes effect on December 1, 2016.
The final overtime exemption rule will increase the minimum salary requirement that has been in effect since 2004.
Standard Minimum Salary
The minimum salary threshold will increase by more than 100%, from $455 per week ($23,660 per annum) to $913 per week ($47,476 per annum). This revised amount represents the 40th percentile of weekly earnings for a full time, salaried employee in the census region with the lowest wages (currently the southern states).
Highly Compensated Employees (HCE)
The compensation threshold for HCE will increase from $100,000 per year to $134,000 per year. This new threshold represents the 90th percentile of full-time, salaried employees nationally.
The salary and HCE thresholds will be updated automatically every three (3) years, beginning January 1, 2020. Each update will be posted by the DOL 150 days before its effective date, starting August 1, 2019. These updates will maintain the 40th and 90th percentiles.
The DOL made no changes to the duties tests that qualify an employee for an overtime exemption. Employers can continue to apply the same federal laws that have been in effect since 2004. State laws, however, may require employers to perform a more thorough analysis. Employees who qualify as exempt under federal provisions may not necessarily meet the state requirements for exemption. Such employees could be owed overtime.
The Finalized Rule allows up to 10% of the salary requirement to be fulfilled by commissions incentive pay, or non-discretionary bonuses. These payments must be made at least once per quarter. Examples of non-discretionary payments, which are provided to employees as incentive to stay with the company or work more efficiently, include:
- Retention bonuses
- Production goal bonuses
- Commissions based on a fixed formula
Discretionary pay, which does not count toward the employee’s salary, is made at the discretion of the employer and does not follow any predetermined standards. An example of a discretionary payment would be an unexpected bonus or a special reward for a specific act.
If an employee fails to earn sufficient non-discretionary pay during a calendar quarter, the employer may make “catch-up” payments to maintain the total compensation above the required threshold. However, if the employee compensation level was below the required threshold and the employer does not make the catch-up payment(s), the employee will be entitled to overtime pay for that quarter or 13-week period.
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