Blog: The California Workplace Advisor

Yesterday, the U.S. Department of Labor (DOL) released the long-awaited Final Rule on overtime pay applicable to employers across the country, which, when implemented on December 1, 2016, is expected to extend overtime pay protections to over 4 million workers within the first year.

Most significantly, the Final Rule increases the salary level for the white collar exemption to the federal overtime pay requirements under the federal Fair Labor Standards Act (FLSA) to $913 a week or $47,476 annually for a full-year worker. (This is the rare case where federal law is now more favorable to employees than California, as the new salary level exceeds California’s minimum salary level for exempt status, which as of January 1, 2016 is $800 a week and $41,600 annually.) The new FLSA salary level represents a slight reduction from the expected level of $50,440 per year, which was identified by the DOL in its proposed rule last year; however it still more than doubles the previous salary level for this exemption.

The FLSA requires most employees be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half of their regular rate of pay for all hours worked over 40 in a workweek. However, the FLSA provides an exemption from both minimum wage and overtime pay for workers employed in certain jobs, including executive, administrative and professional employees (referred to as the “white collar” exemption). For an employee to be exempt: (1) their job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”); (2) they must be paid on a salary basis not subject to reduction based on quality or quantity of work (“salary basis test”); and (3) their salary must meet a minimum salary level, which after December 1, 2016, will be $47,476 annually for a full-year worker (“salary level test”).

Key Provisions of the Final Rule

• The new minimum salary level threshold has been set at $47,476 per year.
• For the first time, employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the salary level, provided such payments are paid on a quarterly or more frequent basis. Employers are permitted to make a “catch-up” payment.
• Employers must be in compliance with the new regulations by Thursday, December 1, 2016. As the effective date is a Thursday, any salary increases to ensure continued use of the exemption for weekly/biweekly employees must be made for the workweek (or pay period) that includes December 1.
• The DOL did not make any changes to the existing job duties test to qualify for exemption (although some states, such as California, already have a more stringent standard requiring that more than half the employee’s time be spent performing exempt functions).
• The compensation level for highly compensated employees (HCE) subject to a more minimal duties test was raised from its previous amount of $100,000 to $134,004 annually (the annual equivalent of the 90th percentile of full-time salaried workers nationally).
• The salary level will increase automatically every three years, beginning on January 1, 2020.  Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the lowest-wage census region (currently the South), estimated to be $51,168 in 2020. The DOL will post new salary levels 150 days in advance of their effective date, beginning August 1, 2019.

DOL Resources on the Final Rule

The Final Rule is scheduled to be published in the Federal Register on May 23, 2016. The DOL has prepared and posted guidance on the Final Rule on the DOL Wage and Hour Division Webpage on the Final 2016 Overtime Rule, including Fact Sheets for the Non-Profit and Higher Education sectors, as well as for States and Local Governments.

Action Items for Employers

Employers should become familiar with the new regulations, as misclassification of employees as exempt from FLSA overtime requirements is a costly mistake. Employers should conduct an audit of all exempt job positions to identify all of the employees in their organization who currently earn less than $913 per week or $47,476 annually, and calculate the costs involved if the salaries of those positions were increased to the threshold minimum level.

In light of the number and type of implicated positions, employers should evaluate options available and develop a proposed course of action. Options may include increasing salary levels to meet the threshold level, evaluating and realigning employee workload, tracking and compensating overtime for all hours worked in excess of 40 per week above a salary, re-classifying employees as non-exempt, reductions in force, or outsourcing certain functions.

Employers should evaluate each impacted position on a position-by-position basis to ensure that positions are properly classified as exempt in the first instance, and any reclassifications take into account both State and federal requirements. Most likely, employers will consider adopting a combination of the above.