Making good on a 2014 directive from President Obama “to modernize and streamline” existing overtime regulations, the Department of Labor (DOL) today published its highly anticipated Final Rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. As expected, the Final Rule (which becomes effective December 1, 2016 ) more than doubles the current $455 weekly minimum salary required for employees to qualify for “white collar” exemptions to the minimum wage and overtime requirements under the Fair Labor Standards Act (FLSA). The DOL expects its new Final Rule to extend minimum wage and overtime protections to more than 4.2 million Americans and increase employee wages by $12 billion over the next 10 years.

Key Changes under the DOL’s Final Rule

The FLSA requires that covered employees be paid minimum wage for all worked hours and overtime at a rate not less than one and one-half their regular rate of pay for all hours worked in excess of 40 hours in a single workweek. To qualify for exemption from the FLSA’s minimum wage and overtime requirements, an employee must be paid a predetermined minimum weekly salary (not subject to reduction based on variations in quality or quantity of work) and primarily perform certain job duties qualifying for one or more of the standard executive, professional or administrative “white collar” exemptions to the FLSA.

In June 2015 the DOL issued a Proposed Rule which gave employers a preview of the likely revisions to the exemption regulations. Today’s Final Rule differs from the DOL’s 2015 Proposed Rule in certain key areas.

Significant changes under the DOL’s Final Rule include the following:

Increase in the Salary Basis Requirement.

The Final Rule increases from $455 to $913 (or $47,476 annually) the minimum weekly salary level necessary for employees to qualify for a white collar exemption under the FLSA. This minimum weekly salary automatically will adjust every three years to a rate equaling the 40th percentile of full-time salaried workers in the nation’s lowest-wage Census region (currently the South). Minimum salary adjustments under the Final Rule will be published at least 150 days before their effective dates, with the first adjustment being effective January 2020. The minimum salary increase in the Final Rule is slightly lower than that contemplated in the Proposed Rule, with the DOL citing to public comments expressing concerns that the regulations should account for salaries paid in lower cost-of-living regions.

Increase in the Salary Requirement for the Highly Compensated Employee (HCE) Exemption.

The Final Rule increases from $100,000 to $134,004 the minimum total annual compensation necessary for a “highly compensated employee” to qualify for exemption under the FLSA. This minimum annual compensation also automatically will adjust every three years to an amount equal to the 90th percentile of full-time salaried employees nationally. Although the compensation increase in today’s Final Rule is larger than contemplated in the Proposed Rule, the change simply is due to an increase in the 90th percentile threshold from 2013 to the fourth quarter of 2014.

Automatic Triennial Updating.

The Proposed Rule contemplated updating the salary thresholds annually using either a wage index (i.e., a fixed-percentile approach using Current Population Survey data) or a price index (i.e., the CPI).  As noted above, the Final Rule has adopted the fixed-percentile approach, with updates to occur every three years rather than annually. Employers that submitted comments said they “strongly opposed” using a fixed-percentile method, arguing that it would result in the “ratcheting” of salaries – that is, with each successive salary update, employers would be expected to convert lower-earning exempt employees to hourly status; those employees would be removed from the CPS data; and the salary threshold would thus rapidly accelerate with each increase. The DOL largely discounted these concerns, finding a lack of historical evidence of “ratcheting” in analyzing data from the last salary increase in 2004. Nonetheless, the DOL did respond to employer comments that an annual update would be unduly volatile and would not provide sufficient notice, and instead adopted triennial updating.

Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement.

Employers now will be allowed to use nondiscretionary bonuses and incentive pay to satisfy up to 10 percent of the DOL’s new salary standard, provided such bonuses/incentives are paid on at least a quarterly basis. Employers also will be able to “catch-up” by quarterly bonus and incentive payments the salary of any exempt employee that falls short of the minimum salary requirement by an amount of up to 10 percent.

Duties Tests.

Surprisingly, the DOL’s Final Rule makes no substantive changes to the standard duties tests required for the executive, administrative and professional exemptions. Although the DOL sought public comments on this issue, the DOL ultimately declined to adopt any changes to the standard duties tests.

Over the next six months, covered employers will need to review exempt positions to ensure compliance with DOL’s new standards. A few suggestions include:

Review Salary Minimums.

Employers may choose to increase the salaries of employees who fall below the DOL’s new $917 weekly minimum, or reclassify employees as nonexempt and take steps to ensure employees are paid a minimum wage and overtime premium in accordance with FLSA standards.

Review Employer Criteria for Establishing Exemption Status.

Employers can expect DOL enforcement initiatives in 2017 (and beyond) to focus on exemption status. Employers are well advised to use the DOL’s Final Rule as an opportunity to review the exemption classifications of all exempt positions to ensure compliance with FLSA standards.

Provide Education and Training to Key Employees.

Employers should consider investing in education and training of front-line managers and human resources representatives tasked with implementing new exemption standards. Employers also should consider development of a communication strategy and action plan for reclassification of affected employees.