On May 18, 2016, the United States Department of Labor (DOL) unveiled new overtime regulations that represent the largest change in the Fair Labor Standards Act (FLSA) in over two-decades.  The final version of the new FLSA rule will increase the salary threshold from $23,660 annually ($455/week) to $47,476 annually ($913/week) for a worker to be considered exempt from the FLSA’s overtime requirements.  The new salary threshold automatically will update to the 40^th percentile of full-time salaried workers in the lowest wage region in the United States, currently the Southeast, every three years.  The FLSA’s other requirement for a worker to be exempt from overtime – that the worker satisfy certain duties – will not change.  Employers will have until Dec. 1, 2016, to comply with the new rule and should consider using the impending 200 day grace period to engage outside counsel in a privileged audit of worker salaries and duties to ensure compliance.

Background On The FLSA’s Overtime Exemption Requirements

As background, currently, in order to be exempt from overtime under the FLSA, a worker must: (i) earn at least $23,660 annually; (ii) earn at least $455 per week; and (iii) perform exempt job duties as outlined in 29 CFR Part 541.  The former two are referred to as the “salary test” and “salary basis test,” respectively.  The third test is known as the “duties test.”  Most workers must meet all three tests in order to be exempt.

In addition to the FLSA, most states also have their own laws that govern overtime exemptions within those jurisdictions.  Some states have “salary test,” “salary basis test,” and “duties test” requirements that are more stringent than the FLSA.  Employers are reminded that they still must satisfy both state overtime law and the new FLSA rule.

Changes To The FLSA’s Overtime Exemption Requirements

The new rule impacts the “salary test” and “salary basis test” while leaving the “duties test” unchanged.  More specifically, the “salary test” is increasing from $23,660 annually to $47,476 annually by Dec. 1, 2016.  The “salary basis test” is similarly increasing from $455 per week to $913 per week by Dec. 1, 2016.  Both the “salary test” and “salary basis test” will also be indexed to the lowest wage region in the United States and will automatically update every three years.  This means that employers should be diligent in performing audits of their employees’ wages and may need to consider salary adjustments in order to comply with the FLSA, particularly in industries that employ low-wage managers.

The new rule is intended to expand access to overtime pay for low-salary workers that work over 40 hours per week but have been treated as exempt because they perform some exempt duties (most commonly executive, administrative, and professional work).  According to the DOL, 35 percent of salaried workers meet the salary-basis aspect of the new rule – i.e., by earning less than $47,476 annually ($913/week) – and will thus be eligible for overtime payments under the new rule.  The DOL also projects that the new salary-basis standard could rise to $51,000 annually ($981/week) by 2020 based on estimated wage growth.  Overall, nearly $12b could be earned by workers in additional overtime payments over the next decade.

For impacted workers, this means that they are likely to either earn more in wages or work fewer hours.  Most employers are expected to either: (i) increase the workers’ salaries so that they satisfy the increased “salary test” and “salary basis test” and remain exempt from overtime; (ii) keep the workers’ salaries the same and pay them any earned overtime (if paying the workers’ earned overtime will be cheaper than their increasing salary); or (iii) monitor the workers’ hours so that they are not working any overtime (note, employers will still have to pay employees overtime if worked, even if not authorized; this does not prevent other discipline for any policy violations).  Employers should keep in mind that these pay increases are only necessary if their workers meet the “duties test.”  If workers do not meet the “duties test,” they should be classified, or reclassified as necessary after an audit, as non-exempt from the FLSA overtime rules.  Non-exempt workers do not need a salary increase if they do not perform any exempt duties under the FLSA and are properly classified as non-exempt from the FLSA overtime rules.

Key Takeaways

• The DOL more than doubled the “salary test” and “salary basis test” for a worker to be exempt from overtime under the FLSA.  The “salary test” will increase from $23,660 annually to $47,476 annually and the “salary basis test” will rise from $455 per week to $913 per week.  The increases are effective Dec. 1, 2016.

• Employers have a variety of options in dealing with the new rule.  For example, they may (i) increase the workers’ salaries so that they satisfy the increased “salary test” and “salary basis test;” (ii) keep the workers’ salaries the same and pay them any earned overtime; or (iii) monitor the workers’ hours so that they are not working any overtime, among other options.

• While the “duties test” remains the same under the new rule, employers should not assume that they satisfy that test.  The “duties test” is always the most difficult with which to comply.  The new rule will likely result in an increase in FLSA suits when it goes into effect on Dec. 1, 2016.  As a consequence of any suits, increased scrutiny may be applied to employees’ job descriptions and assignments.  Employers are advised to take time in the next 200 days consult with counsel in order to perform a privileged audit and to ensure that employees satisfy all three of the FLSA and state law overtime exemption tests.