After much ado, on May 18, 2016, the Department of Labor (DOL) released the final changes to Part 541 regulations, more than doubling the minimum salary threshold to qualify for the executive, administrative, and professional exemptions to the Fair Labor Standards Act (FLSA). Effective December 1, 2016, the minimum salary threshold will increase from $23,660 per year to $47,476 per year. This increase is set to automatically adjust every three years beginning on January 1, 2020. Although the salary required to qualify for these exemptions will increase, the job duties test has not changed.
Under the final regulations, employees who do not receive the new minimum salary level as of December 1, 2016, will not qualify for any of these three exemptions from the FSLA’s overtime compensation requirements, regardless of their job duties. Nonexempt employees must be paid overtime compensation when they work more than 40 hours in a workweek.
The DOL is implementing a time-limited non-enforcement policy for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. This non-enforcement policy will run from December 1, 2016, to March 17, 2019. Although this should provide some relief for this single group of employers, it does not appear that the DOL intends to provide similar carve-outs to other service providers whose income streams are based on Medicaid-funding, grant-funding, or similar sources.
The December 1 effective date means that employers will have about six and one-half months to analyze the impact and make necessary adjustments. We recommend employers begin this analysis now to avoid costly overtime claims down the road. It is worth remembering that failure to pay overtime can result in double damages and a mandatory award of attorney’s fees to a claimant.
Inclusion of Bonuses and Incentive Pay When Calculating Salary
It’s not all bad news for employers; under the changes, for the first time, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level, so long as those payments are made at least quarterly or on a more frequent basis.
Because it applies to 10 percent of the salary level, this means that up to $91.30 in nondiscretionary bonus and incentive payments per week, or $4,747.60 in nondiscretionary bonus and incentive payments per year, paid no less frequently than on a quarterly basis, can count toward meeting the $47,476 threshold. This also means that even if the employer can make use of the full 10 percent, the employee still will need to receive a salary of at least $821.70 per week, or $42,728.40 per year.
The regulations also allow employers to make a catch-up payment at the end of a quarter to make up any shortfall in the nondiscretionary 10 percent portion of the salary amount. If, by the last pay period of the quarter, the sum of the employee’s actual weekly salary, plus received nondiscretionary bonus, incentive, and/or commission payments, does not equal $11,869 (i.e., 13 times the weekly minimum of $913), an employer may make one final payment to reach the $11,869 level no later than the next pay period after the end of the quarter. Any such final payment made after the end of the 13-week period may count only toward the prior quarter’s salary amount and not toward the salary amount in the quarter it was paid.
Employers should note that although nondiscretionary bonuses, commissions, and other incentive payments will still count toward the total compensation requirements for the highly compensated employee exemption, they cannot count such payments toward the minimum salary requirements for the highly compensated employee exemption.
Total Compensation and Salary Level Indexing
In addition to the executive, administrative, and professional exemptions, another exemption in Part 541 is the highly compensated employee (HCE) exemption. Besides meeting a minimal duties test, an HCE’s total annual compensation under the current (i.e., 2004) regulations must be at least $100,000, of which at least $455 per week must be in the form of a salary. Under the final regulations, the new minimum total compensation threshold is $134,004, of which at least $913 per week must be in the form of salary.
The final rule also indexes the total compensation and salary level requirements for the HCE exemption every three years, consistent with the timing of the indexing of the minimum salary level for the executive, administrative, and professional exemptions.
No Changes to the Duties Test
The DOL did not make changes to the duties tests for any of the exemptions in the final regulations. Accordingly, employers should begin developing and finalizing their compliance and communications plans now, with implementation occurring no later than December 1, 2016. Employers should begin to:
(1) Evaluate Salary and Pay Information
(2) Evaluate Work Hours and Staffing Needs
(3) Evaluate Potential Changes to Meet the Revised Amendments
Although these necessary changes may be costly, there are several potential options to meet the requirements of the new regulations.
→Increase the salaries of some or all exempt employees to the new minimum.
→Reduce or eliminate bonuses, commissions, and incentive pay for those exempt employees whose total compensation may meet the new minimum – and increase their salaries by these bonus, commission, and incentive amounts.
→Restructure bonus, commission, and incentive pay programs to meet the requirements of the new regulations that they be paid on a quarterly or more frequent basis, thereby allowing employers to continue to incentivize managers to grow sales at the stores, restaurants, and hotels they manage.
→Reclassify exempt employees who don’t meet the new minimum salary, and pay them hourly. This option will also require employers to educate these employees about timekeeping requirements, meal and rest breaks, and other wage and hour requirements and may require other steps to minimize the amount of overtime worked, such as changing staffing levels in certain locations and at certain times to eliminate unnecessary overtime hours.
→Reclassify exempt employees and change their compensation structure to pay them on a commission or fluctuating-workweek basis. As with the prior option, this option will also require employers to educate these employees about timekeeping and wage and hour requirements and may require other steps to minimize the amount of overtime worked, such as changing staffing levels in certain locations and at certain times to eliminate unnecessary overtime hours.
Employers will also need to keep in mind that they may need to change their benefit plans for employees who are reclassified as nonexempt. It may also make sense to consider changing or creating new timekeeping practices and systems for employees who are reclassified as hourly employees. Time clock systems, for example, will not capture compensable work performed by employees off-site via mobile phone or email or while traveling.
Faulkner Law Offices, PLLC can help evaluate the impact these changes will have on your business and help to implement a strategy to address them and avoid expensive overtime claims.