On May 18, 2016, the U.S. Department of Labor (DOL) issued its final rule raising the minimum salary threshold for the white collar exemptions from $23,660 to $47,476 annually. The final rule becomes effective on December 1, 2016. The DOL predicts that this change will extend overtime pay to over four million workers who presently are ineligible.

What Is the Background?

To qualify for the so-called "white collar" exemptions—executive, administrative and professional—three conditions must be met: (1) the employee must be paid on a "salary basis" (i.e., receive a fixed amount of pay per workweek regardless of the number of hours worked); (2) the salary must be equal to or greater than the minimum salary threshold; and (3) the job must meet the "duties test" of the particular exemption.

What Is Changing?

Although there was speculation that the DOL's final rule might make changes to the duties tests, the final rule instead addresses only the minimum salary threshold, increasing it from $23,660 to $47,476 annually. Increasing the minimum salary threshold means that employees earning less than $47,476 will not qualify for the white collar exemptions. Notably, the DOL's proposed rule, published in July 2015, contemplated a minimum salary threshold of $50,440, which was based on the 40th percentile of full-time salaried workers nationally. The final rule sets the threshold at $47,476, which is based on the 40th percentile of full-time salaried workers in the lowest-wage Census Region, currently the South. The DOL explained that it made this adjustment in response to public comments expressing concern about the impact of the proposed $50,440 threshold on small businesses and businesses in regions where wages generally are lower.

The final rule also impacts the "highly compensated employee" exemption by increasing the salary threshold for that exemption from $100,000 to $134,000 (90th percentile of full-time salaried workers nationally).

While the proposed rule envisioned an annual automatic adjustment to the minimum salary threshold, the final rule provides for adjustments every three years to maintain the levels at the percentiles noted above.

What Compensation Counts Toward the Salary Threshold?

The final rule allows employers to count certain nondiscretionary bonuses and incentive payments (including commissions) toward up to 10 percent of the new salary level. This is a silver lining for employers with employees whose base salaries may be less than the new $47,476 threshold, but who also earn additional compensation in the form of bonuses, commissions and other incentive payments.

Special Guidance for Higher Education and Nonprofit Employers

The final rule does not contain exceptions for colleges, universities and nonprofit employers. However, the DOL is releasing separate guidance that will provide some options for these employers, including, in some cases, the use of comp time. This guidance provides a more detailed analysis of some of the final rule's impacts on these types of organizations.

What Should Employers Do?

The changes to the regulations become effective December 1, 2016. This is a welcome change to the proposed rule that had considered making the changes effective only 60 days after publication of the final rule. However, even with the additional time, employers should begin now to decide how to deal with the changes in the law.

For starters, employers should identify all positions in their organizations that are classified as exempt but pay a salary less than $47,476. Some media reports have implied that the DOL's final rule means an automatic salary increase to $47,476 for exempt employees currently earning less. Other reports have implied that the rule means guaranteed overtime pay for employees earning less than $47,476. The reality is that employers have options and the path forward is more nuanced.

Raising salaries to $47,476 is, indeed, one option. So is reclassifying exempt employees earning less than $47,476 to non-exempt and paying them overtime for hours over 40 in a workweek. Other options include limiting employees to 40 hours per week and keeping their salary levels the same. Many employers will decide to use more part-time employees to lessen or even eliminate overtime costs. For some employers, implementing the "fluctuating workweek" pay method, whereby employees are paid at a half-time rate (rather than time and one-half) for overtime hours may be appropriate.

In short, there are many options for employers to choose from. When evaluating and deciding on these options, employers should keep in mind how their decisions will affect employee relations, retention goals and administrative processes. On the employee relations side, employees often consider reclassification from exempt to non-exempt to be a demotion. There are likewise significant employee relations effects if an employee earning $35,000 is given an increase to $50,000 to retain eligibility for exempt status, but a co-worker earning $52,000 receives no increase.

In terms of administrative processes, reclassifying an exempt employee to non-exempt generally will require changes to timekeeping and payroll practices. Employers will need to track hours worked and determine which activities the employee engages in are compensable and which are not.

The final rule's impact also presents a good opportunity for employers to audit their exempt/non-exempt classifications generally to correct any misclassifications and update classifications of jobs that may have changed over the years. It is also an opportune time to audit payroll practices to ensure that all working time is recorded and paid, all compensation is properly included in (or excluded from, as the case may be) the overtime calculation and exempt employees are paid on a truly "salaried basis."