Final Rule – “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” 

 

On Tuesday, May 17, 2016 the Department of Labor (DOL) Wage and Hour Division (WHD) released the final rule on the Fair Labor Standards Act (FLSA) overtime regulations. The final regulations will have a significant impact on many employers and employees and has an effective date of December 1, 2016. The final regulations make changes to the minimum salary threshold, highly compensated employee exemption limit and automatic annual adjustments to the salary threshold.

 

Background

The DOL released a proposed rule on July 6, 2015 to update the regulations governing which executive, administrative, and professional employees (white collar workers) are entitled to the FLSA’s minimum wage and overtime pay protections. These regulations have not been updated since 2004; the proposed rule would update the salary level required for exemption to ensure that the FLSA’s intended overtime protections are fully implemented. These proposed changes were intended to simplify the identification of nonexempt employees and make the executive, administrative and professional employee exemption easier to apply and easier to understand for both employers and workers.

 

Key Provisions under the Final Rule

 

Salary Threshold – Raise the standard salary level required for exemption at the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region (which is currently in the South). For 2016 this will raise the salary threshold from $455 a week to $913 a week; this is increasing the current annual salary threshold of $23,660 to $47,476

 

Highly Compensated Employee (HCE) Threshold – Increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of full-time salaried workers from $100,000 currently to $134,004

 

Automatic Salary Threshold Update – Automatically update the salary and compensation thresholds every three years, beginning January 1, 2020. The DOL estimates that the salary threshold will be $51,168 in 2020 and the HCE threshold to be an estimated $147,524

 

Bonuses and commissions – Up to 10 percent of the salary threshold for non-HCE employees may be met by non-discretionary bonuses, incentive pay or commissions. Such payments must be made at a minimum on a quarterly basis

 

Duties Test – The final rule made no changes to the duties test

 

Non-Profits, Higher Education and States/Local Governments

 

Non-profits – Nonprofit employers, are among those who may be most impacted by these final regulations. Though it had been rumored that perhaps they would be exempt from the final rule, this is not the case. There is no exemption provided from the overtime requirements, see here for details on how the final rule affects the non-profit sector: https://www.dol.gov/sites/default/files/overtime-nonprofit.pdf. Nonprofit employers will be challenged with finding a way to still provide much-needed services with much less staffing; this could ultimately lead to a significant cut in the services these types of organizations provide. The DOL has provided guidance material for non-profits which can be viewed here: https://www.dol.gov/whd/overtime/final2016/nonprofit-guidance.pdf

 

Higher Education – Employees of higher education institutions are not exempt from FLSA wage and overtime rules, but there are provisions that apply to many employees that make these employees ineligible for overtime; which makes such employees unaffected by the new rules. Some examples of these employees may include: bona fide teachers, academic administrative personnel, and graduate/undergraduate students. For additional details, click here: https://www.dol.gov/sites/default/files/overtime-highereducation.pdf. The DOL has also provided additional guidance for higher education institutions here: https://www.dol.gov/whd/overtime/final2016/highered-guidance.pdf.

 

States and Local Government – There is no blanket exemption from the overtime requirements. However, there are special provisions under the FLSA for state and local governments; this would include compensatory time (otherwise known as “comp time”). For specific details, click here: https://www.dol.gov/sites/default/files/overtime-government.pdf.

 

Next Steps

 

Employers that have already begun the process of analyzing the impact the proposed changes have on their businesses and have designed a plan of action are now in a good position to use the next six months to implement their plan. These employers should revisit the details and make the necessary revisions to update their plan so that the forecasted adjustments are aligned with the finalized salary thresholds.

 

Employers who have not yet planned for the changes that the final rule requires still have time to assess the impact; but will need to act quickly if it is determined that employees will need to be reclassified and/or have salary adjustments.

 

The DOL has made available guidance materials to assist employers with the new overtime regulations. Links the final rule and to all of these materials can be found here: https://www.dol.gov/WHD/overtime/final2016/.

 

 

Thank you for choosing Paylocity as your Payroll Tax partner. Should you have any questions please contact your Paylocity Account Manager.

 

This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.