Final Rule on the Fair Labor Standards Act

On Wednesday May 18, 2016, the long awaited new Final Rule on the Fair Labor Standards Act was published by the U.S. Labor Secretary. The Rule takes effect on December 1, 2016 and sets the minimum salary threshold for exempt employees at $47,476 ($913 weekly), up from the current $23,660 annually.

The final rule does not make any changes to the “duties test” that determines whether white collar salaried workers earning more than the salary threshold are exempt from the overtime pay requirement. Workers earning less than the threshold must be paid overtime based on the employee’s state’s wage-hour laws. (Employers need to check the states where they do business for any possible exceptions or variations from the general rules.)

This means they must be assigned an hourly rate of pay and their hours must be tracked. Some workers that are already exempt from overtime for other reasons, such as outside sales people, will remain exempt despite their base salary. This new rule will only affect workers who were overtime exempt and already subject to the previous minimum salary.

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This change is expected to affect 35% of all salaried workers who will now become eligible for overtime based solely on their current salary.

In addition to raising the salary threshold, the final regulations also address bonuses, incentive payments, and commissions. The final rule will allow up to 10% of the salary threshold for non-highly compensated employee (HCE) to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis.

Automatic updates.

The final rule will update the salary threshold every three years, beginning 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, which is estimated to be $51,168 in 2020. The HCE threshold will increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020.

The new rule also increases the minimum salary threshold for the Highly Compensated Employee (HCE) exemption from $100,000 per year to $134,004 per year. This exemption can be used when an employee carries out a limited number of executive, administrative, or professional duties, but is very well-compensated. This number will also increase every three years, and is expected to rise to approximately $147,524 on January 1, 2020.

Exempt salaried employees who fall below the minimum threshold salary will have to be reclassified as non-exempt, or will have to have their salary reset to meet the minimum standard. Additionally, employers will need to consider the “wage compression effect” on other positions when reclassifying employees. Employers should analyze the direct and indirect impact this final rule will have on its workforce far in advance of the effective date.

Some state laws create different minimum salary levels. When state laws differ from the FLSA, an employer must comply with the standard most beneficial to employees. Presently, the federal minimum salary level is higher than any state-mandated minimum, and therefore must be followed.

In preparation for the new rule, we have available the following materials, all of which can be found in our HR Support Center.

• FLSA Changes: Decision Making Guide
• FLSA Changes: Implementation Guide
• 2 Minute HR trainings on the new rule, the executive, administrative, and professional exemptions, and the salaried non-exempt classification
• A memo requesting that employees track their hours for planning purposes
• A letter to employees regarding their classification change
• A guide to calculating overtime for non-exempt employees who receive non-discretionary bonuses or commissions

If you would like to subscribe to the support center, please contact our support team. We are offering access to the HR Library for at a discounted rate of $15 per month for a limited time. The Library contains an astonishing array of resources valuable to any HR team or small business. Also temporarily discounted is the HR Support Center Library, which includes all HR Library materials plus unlimited telephone support from a knowledgeable HR expert, available for $30 per month.

These rates are good through July 1st.

Additional details on the new FLSA rules can be found here:

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