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The Fair Labor Standards Act (FLSA) White Collar Overtime Exemption Rules Updates Released

The U.S. Department of Labor has issued its final rule on updated exemptions from overtime requirements under the Fair Labor Standards Act.  The rule, which has been the subject of discussion and public comment since 2014, is intended to modernize the so-called “white collar” exemptions for executive, administrative, professional, outside sales and computer employees.

The most significant changes effected by the new rule are those related to the “salary basis test,” the minimum weekly salary that must be paid to an employee, regardless of the quality or quantity of work, in order to maintain one of these exemptions. Since 2004, this amount has been set at $455 per week for all of the white collar exemptions. The new rule now sets the minimum weekly amount at the 40th percentile of full-time salaried workers in the lowest-wage Census Region.  Currently, the figure is $913 per week ($47,476 per year).  The amount will increase automatically every three years, with the first increase to occur on January 1, 2020.  Practically, this means that any currently exempt employees earning less than $ 913 per week will no longer be considered exempt after the new rule takes effect, regardless of their duties, and will have to be paid overtime for all hours worked over 40 in a given week.

The minimum annual salary for “Highly Compensated Employees” will be raised from $100,000 per year to the 90th percentile of full-time salaried workers nationally.  The initial threshold when the rule goes into effect will be $134,004 per year.

Key Takeaways:

  • These new rules will go into effect on December 1, 2016.  Employers have some time to prepare themselves for compliance.
  • Employers need to re-examine the current classification of all exempt employees to ensure that employees are properly classified.
  • Employers will want to provide some education to employees about this law and how it may impact individual employees or the business generally – in terms of overtime expenditures  and recordkeeping.  Employees who are reclassified are not being “demoted” to “hourly,” as some pundits have put it.  This reclassification is a requirement of the law.  It is relatively simple to explain, and may require some culture shift – but it can be done, with good and positive communication.
  • Employers will need to educate managers and employees about keeping track of time.  Employers are responsible for keeping accurate records of all time worked by employees.  Formerly exempt employees may not be used to tracking or reporting the hours that they work each week.   Employers should create good systems for those employees to now track their time accurately.
  • Employers will want to analyze efficiencies of employee work.  Employees who may have taken work home or worked longer hours previously because they were exempt, may now have to change some of their work habits in order to be able to perform their work within a 40 hour time frame, or in order to avoid excessive overtime.  Managers should work with employees to find efficiencies in their work habits, or to adjust assignments or expectations, to manage overtime effectively.
  • Employers may want to reconsider staffing levels and staffing schedules, depending upon the impact of the reclassification of their employees.  There are many factors that go into these decisions, both business factors and human resource planning factors.  All should be considered carefully before drastic staffing changes are enacted.

Please contact the Labor and Employment Team at Paul Frank + Collins if you have questions or need assistance.