By Pamela Wolf, J.D. The Labor Department has released its highly anticipated final rule on the FLSA exemption for executive, administrative, professional, outside sales, and computer employees—the so-called “white collar” or “EAP” overtime exemption—making some significant changes to the proposed version of the regulation. While some of these changes are within the range of what stakeholders anticipated, others are surprising. The changes are effective December 1, 2016. Bonuses and incentives. The first surprise is that while the final rule, like the proposed rule, makes no changes to the “duties tests” used to determine whether the white collar exemption applies, it amends the salary basis test so that employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level—a move not included in the proposed regulation, although comments were solicited. Lowest-wage Census Region. The final rule also adjusts downward the weekly salary threshold below which overtime must be paid from the proposed $970 to $913 a week, or stated annually, from $50,440, as projected for 2016, to $47,476—a move that was hoped for, if not anticipated. More surprising is that while the proposed rule set this salary threshold at the 40th percentile of full-time salaried workers nationally, the final rule sets it at the 40th percentile of full-time salaries in the lowest-wage Census Region, which is currently the South. This change was in response to concerns that the “one-size-fits-all” approach of the proposed rule did not take into account the lower salaries paid in some areas of the country, particularly in the South. HCE exemption. The final rule also increases the pay required for Part 541’s “highly compensated employee” (HCE) exemption to apply from the proposed $122,148 to $134,004—a move not unexpected since it was hoped that the final version would narrow the group of employees who would become overtime-eligible, and the upward adjustment does that. Three-year adjustments. A final surprising move, however, is that while the proposed rule would have adjusted both exemption thresholds annually, with requests for comments, based on a CPI or percentile basis, the final rule makes automatic adjustments every three years based on the standard salary level at the 40th percentile of full-time salaried workers in the lowest-wage Census region and the HCE total annual compensation at the 90th percentile of full-time salaried workers nationally. The DOL made this change in response to concerns about the burdens associated with updating the salary level on an annual basis. The first adjustment will occur on January 1, 2020. Proposal drew much controversy. The DOL published its proposed overtime rule in the Federal Register on July 6, 2015. It immediately attracted controversy that led to Congressional hearings and even proposed legislation that would negate any final rule. Republican lawmakers on March 18 unveiled legislation that would require the Labor Secretary to nullify the proposed rule. Introduced by Senator Tim Scott (R-S.C.) (S. 2707) and Representative Tim Walberg (R-Mich.) (H.R. 4773), the measure would also require the Secretary to conduct a specified economic analysis on employers before promulgating any substantially similar rule. Most recently, on May 11, the Senate Committee on Small Business and Entrepreneurship held a hearing on the anticipated final rule. At the hearing, “An Examination of the Administration’s Overtime Rule and the Rising Costs of Doing Business,” Littler Mendelson attorney Tammy D. McCutchen, who previously served as the DOL’s Wage and Hour Administrator from 2001 to 2004, pointed out that when the proposed rule was first published in July 2015, using its methodology would result in a threshold salary level of $921 per week or $47,892 annually, before the overtime exemption would apply—a level just slightly higher than he final rule’s $47,476 threshold. McCutchen had suggested that the DOL would be unable to justify anything greater than a threshold of just $35,000. The final version of the rule came after input from 270,000 public comments and extensive outreach meetings with employers, business associations, small businesses, workers, worker advocates, non-profit organizations, educational institutions, and state and local government representatives, according to a White House fact sheet. Making more workers eligible for overtime. The final rule sets the white collar exemption’s salary floor substantially higher than the $455 a week ($23,660 annually) currently set under FLSA regulations and also increases the floor for the HCE exemption substantially from its current $100,000 a year. These adjustments are expected to extend overtime protections to 4.2 million more American workers who are currently ineligible for overtime pay under federal law and are projected to boost wages for workers by $12 billion over the next 10 years, with average annual wage increases of $1.2 billion, according to the White House fact sheet. Why the changes? The Labor Department said that it is updating the regulations to ensure that the FLSA's intended overtime protections are fully implemented and to simplify the identification of overtime-eligible workers. The changes are aimed at making the white collar exemption easier for employers and workers to understand and apply. The updates will also help ensure that going forward, “the regulations continue to appropriately separate workers who are entitled to overtime protections and those who may be exempt.” White collar exemption tests. In a fact sheet for private employers, the Labor Department underscored that generally, to claim the white collar exemption under the final regulations, individuals must satisfy three criteria, or tests, to be exempt from overtime:
- They must be paid on a salary basis not subject to reduction based on quality or quantity of work (salary basis test) rather than, for example, on an hourly basis;
- Their salary must meet a minimum salary level, which as of December 1, 2016, will be $913 per week, which is equivalent to $47,476 annually for a full-year worker (salary level test); and
- The employee’s primary job duty must involve the kind of work associated with exempt executive, administrative, or professional employees (standard duties test).
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