On May 18, 2016, the U.S. Department of Labor issued its Final Rule updating the overtime pay exemption for “white collar” employees that fall within the executive, administrative, and professional exemption under the Fair Labor Standards Act (“FLSA”).

Who will qualify for overtime under the new rule?

As widely anticipated, the Final Rule, which goes into effect December 1, 2016, significantly raises the minimum salary threshold for executive, administrative, and professional employees from $455 per week ($23,660 per year) to $913 per week  ($47,476 per year). The Department of Labor estimates that this increase will extend protections to approximately 4.2 million workers that are currently exempt from overtime pay.

Under the Final Rule, employers are now permitted to use non-discretionary bonuses and incentive payments, including commissions that are paid at least quarterly, to satisfy up to 10 percent of the new standard salary level. Despite these changes to the “salary test,” the related “duties” test for white collar employees remains unchanged.

How does the rule affect highly compensated employees?

Receiving less attention, but equally noteworthy, the Final Rule also raises the annual compensation exemption level for highly compensated employees (HCE) from $100,000 to $134,004. To be exempt from overtime as a HCE, an employee must receive the new standard weekly salary level of $913 on a salary or fee basis, while the remainder of the total annual compensation may include other non-discretionary bonuses and compensation, and pass a minimal “duties” test (i.e., customarily and regularly perform at least one of the duties contained in the executive, administrative or professional exemption).

The Final Rule includes a mechanism by which the standard salary level and HCE level, which are set at the 40th and 90th percentile for full-time salaried workers, respectively, will automatically update every three years beginning in January 2020.

Review of compensation and related policies and practices prior to December 1, 2016

These new overtime standards will impact employees across the economic spectrum from highly compensated executives to lower wage workers. To ensure compliance, employers will need to proactively evaluate their current policies and practices prior to the effective date of the Final Rule on December 1, 2016.