What is the impact of the US Department of Labor December 2016 rule change on overtime exemption for salaried employees?

Amy A. Matthews

Author: Amy A. Matthews

POST DATE: 7.13.16
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The United States Department of Labor (“DOL”) issued a final rule that significantly increases the minimum salary for the executive, administrative, professional, and computer employee exemptions under the Fair Labor Standards Act.

Under the current rule, an employee who is classified under one of these exemptions is exempt from overtime if the employee receives a salary of at least $455 per week ($23,660 annually) and otherwise meets additional criteria specific to each exemption.

The DOL’s final rule, which will take effect December 1, 2016, increases the minimum to $913 a week ($47,476 annually), or slightly more than DOUBLE the current amount. The final rule further provides that beginning January 1, 2020, and every three years thereafter, the DOL will update the minimum salary, presumably upward and consistent with general cost-of-living increases.

Although somewhat startling at first glance, the final rule does not necessarily mean substantial across-the-board salary increases for all exempt employees.

By following the steps below, most organizations will be able to substantially mitigate the cost impact of the final rule change, while at the same time avoid significant losses in terms of operational efficiency:

Step 1: Determine which employees fall under the above-listed exemptions. (As a general rule of thumb, this is employees who are paid a salary, but also see this DOL fact sheet for additional information on each exemption.)

Step 2: For each such exempt employee, determine whether the employee’s salary meets or exceeds the amount in the final rule, i.e., $913 per week ($47,476 annually).

Step 3: For each exempt employee whose salary does not meet or exceed the amount in the final rule, your two options are as follows:

  • Option 1: Increase the employee’s salary to the amount in the final rule and maintain the overtime exemption; or
  • Option 2: Maintain the employee’s salary and reclassify the employee as non-exempt, in which case you must pay overtime for any time worked in excess of 40 hours in a workweek, as well as track the employee’s hours much more closely than previously and in a manner consistent with other non-exempt employees.

Two additional points about the options under Step 3:

First, regarding Option 1, if the employer provides non-discretionary bonuses, incentives, or commissions at least quarterly, then the employer can apply up to 10 percent of that amount toward the minimum salary to maintain the exemption. To use an example, if an employee receives a $1,000 commission at the end of Q1, the employer need only provide a salary of $10,869 for that quarter, because the commission is less than 10 percent of the minimum salary to maintain the exemption (i.e., $913 per week x 13 weeks per quarter = minimum salary of $11,869 to maintain the exemption).

Second, regarding Option 2, to reasonably control the costs associated with switching an employee from exempt to non-exempt, employers should consider implementing measures to control the amount of overtime worked, for example through job sharing or hiring additional workers.

We also reiterate that the final rule does not take effect until December 1, 2016. In the interim managers should conduct extensive cost/benefit analysis of various scenarios and arrive at an efficient exempt/non-exempt job classification structure.

The DOL’s formal announcement of the final rule is available here, which includes a link to the final rule: https://www.dol.gov/agencies/whd/overtime.

Please contact one of the CCHA labor and employment attorneys for any assistance you may need with the Fair Labor Standards Act or other labor and employment issues: Amy A. Matthews, Brent R. Borg, Jessica L. Billingsley, Liberty L. Roberts, Andrew A. Manna.