NEW DEPARTMENT OF LABOR REGULATIONS SIGNIFICANTLY IMPACT COMPENSATION REQUIREMENTS FOR SALARIED EMPLOYEES

On May 18, 2016, the U.S. Department of Labor published the final rule revising the “white collar” overtime exemption regulations.  The most significant change made by the final rule is raising the minimum salary level for the white collar — executive, administrative and professional — exemptions under the Fair Labor Standards Act from $455 per week to $913 per week. An individual earning below that threshold will not fall under the white collar exemptions from overtime pay and must now be paid overtime. The final rule permits additional compensation — such as bonuses and commissions — to satisfy up to 10 percent of the minimum salary level. The final rule also raises the salary requirements for highly compensated employees from $100,000 per year to $134,004 per year. For the first time, the DOL has included a mechanism to automatically increase both of these salary levels.

While these changes impact all employers, the food service industry is one of the most significantly affected.   Careful attention to the final rule should be given now so that all employers are prepared when the new regulations take effect on December 1, 2016.

Key Changes

• Minimum Salary Level:  The new rule more than doubles the current salary requirements of $455 per week (or $23,660 per year), setting the minimum salary at $913 per week, or $47,476 per year. In other words, under the new requirements, all employees who paid on a salary basis and exempt from overtime must now receive at least $913 per week in guaranteed compensation. This increase now places the federal minimum salary level higher than the corresponding salary levels in every state. 
   
• Use of Non-Discretionary Bonuses and Commissions: The DOL’s final rule permits employers to use certain other forms of compensation to satisfy up to 10 percent of the new minimum salary requirements. The additional compensation must be paid at least quarterly and may include nondiscretionary bonuses, incentive payments and commissions. The final rule requires employers to pay exempt employees at least 90 percent of the minimum salary level per workweek. This equates to $821.70 per workweek or $42,728.40 annualized. Additional compensation — up to $4,747.60 per year, or $1,186.90 per quarter — may be used to satisfy the remainder of the salary requirements.
  
  If, at the end of a quarter, the salary plus 10 percent of the additional compensation does not equal $913 per workweek, the final rule permits a one-time shortfall payment to be made. The shortfall payment must be paid no later than the first pay period following the end of the quarter. The shortfall payment must satisfy the minimum salary for the preceding quarter, as spread over a 13-week period. Such a payment applies only to the preceding quarter and cannot be used to meet the salary requirements for the quarter in which it was paid. If a shortfall payment is not made, overtime is then owed for hours worked over 40 per workweek in the corresponding quarter.  
   
• Highly Compensated Employees: The current minimum salary level to qualify as a highly compensated employee is $100,000 per year. The final rule increases it to $134,004.
   
• Automatic Increases: The final rule automatically increases the minimum salary level every three years. The first update will take effect Jan. 1, 2020, with future increases every three years, effective Jan. 1 of that year. The minimum salary for exempt white collar workers will be pegged to the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage census region (currently the South).
  
  The highly compensated employee salary threshold will also be reset every three years at the 90th percentile of earnings of full-time salaried workers nationwide, based on BLS data from the prior year’s second quarter. The DOL will publish the new rates in the Federal Register at least 150 days before the updated salary levels go into effect.
   
• Effective Date: The new changes will go into effect on Dec. 1, 2016. As of that date, the minimum salary levels for white collar exemptions and highly compensated employees must be in place.

Next Steps

All employers should review the current salary levels and compensation plans for all exempt employees to determine whether the new salary requirements are met. This includes:

• Identifying impacted employees;
• Determining whether to increase base salaries or to reclassify employees to overtime eligible; and
• Determining whether any additional compensation (such as bonuses or commissions) can be used to meet up to 10% of the new salary requirements.

To the extent the decision is made to reclassify employees from overtime exempt to overtime eligible, employers should also develop comprehensive guidance to: (1) determine new hourly rates for impacted employees; (2) revise or update current timekeeping programs and policies to reflect the changes; and (3) implement training for both managers and employees addressing the changes.  Employers should also keep in mind resulting notice requirements.  For example, any changes made to the compensation of District of Columbia employees must be accompanied by an updated Wage Theft Prevention Act notice.

Libby Henninger is a Shareholder in the Washington, D.C. office of Littler Mendelson. She advises and represents employers in a broad range of employment law matters.