Update as of July 21, 2017: Under the leadership of new Secretary of Labor Alex Acosta, the Department of Labor signaled last month that it will drop its defense of the new overtime rule. As a result, the previously proposed and hotly debated overtime rule, which would have raised the minimum exempt salary threshold from $23,660 per year to $47,476 per year, will not be implemented. Importantly, California employers remain bound to the State’s higher salary threshold of $43,680 as of January 1, 2017. All employers should remain alert for future changes to the federal overtime rule as Secretary Acosta has indicated that he’s interested in implementing some increase to the minimum salary requirement, albeit smaller than what was previously proposed.

Update as of November 22, 2016: A U.S. District Judge in Texas entered a nationwide injunction to delay this rule from taking effect on December 1, 2016. The rule will be delayed until a full hearing has been held, after which point the Judge will determine whether to allow implementation of the rule to proceed, or to overturn it. Employers should not react to this ruling until a final determination is made. Those who have already taken steps to comply should leave decisions in place, and those who have not may want to postpone taking any action. 

The U.S. Department of Labor (DOL) today released the long-anticipated final rule updating the “white collar worker exemption” under the Fair Labor Standards Act (FLSA). The DOL began working on updated regulations in 2015, which will expand the availability of overtime pay to some previously considered exempt white collar workers. The final rule takes effect on December 1, 2016, so employers must begin to prepare now

Key Provisions

The final rule updates the salary and compensation levels needed for executive, administrative, and professional workers – white collar workers – to be exempt from overtime compensation. Under the current federal rule, those earning more than $23,660 per year are not eligible for overtime pay. The new rule doubles this minimum salary threshold to $47,476 per year, or $913 per week. This figure is based on the 40th percentile of full-time salaried workers in the South, which is the lowest-income region, and will automatically update every three years to reflect wage growth. Also updated is the annual compensation threshold for highly compensated employees, which increases from $100,000 to $134,004.

Importantly, the final rule also amends the salary basis test to allow employers to use non-discretionary bonuses and incentive payments – including commissions – to satisfy up to 10% of the new standard salary level.

Noticeably absent from the final rule is a bright-line duties test for employers to use in determining which workers are eligible for overtime pay. The DOL previously proposed a stricter duties test, including a requirement that a worker spend at least 50% of his or her time performing exempt job duties in order to be exempt from overtime pay. Commenters were overwhelmingly opposed to this proposal, to which the DOL responded by keeping the duties unchanged.

Next Steps

While the DOL suggests that this final rule brings greater clarity for employers and expanded protection for employees, the changes that will take effect on December 1 will have a significant impact on employers across all industries. Employers should act now by reviewing employee classifications and identifying which employees will no longer be considered exempt under this new rule.
California employers need to remain extra alert, as the new federal rule is not consistent with State Law. California’s annual threshold requirement is set lower at $41,600, which means that California employers will need to follow federal salary standards. However, because California maintains a duties test, employers will also need to continue to apply the State rule that workers spend at least 51% of their time engaged in exempt job duties in order to remain ineligible from overtime pay.