On May 18, 2016, the U.S. Department of Labor published the Final Rule on Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees under the Fair Labor Standards Act (“FLSA”) (“Final Rule”).  This amends what is more commonly known as the “white-collar” overtime exemption, and will expand overtime eligibility to an estimated 4.2 million additional workers.  The Final Rule takes effect December 1, 2016, giving employers roughly six months to determine the best approach for complying with the new standards.

The FLSA requires that employees who work more than 40 hours per week be paid at 1.5 times the normal hourly rate for each additional hour worked.  However, the white-collar exemption excludes employees who qualify under three tests: (1) Salary Basis, (2) Minimum Salary Level, and (3) Standard Duties.  An employee must qualify under all three tests for the exemption to apply.

The biggest changes are to the minimum salary level test.  Previously, the threshold for the exemption was $455 per week.  Under the Final Rule, this is more than doubled to $913 per week (or $47,476 per year).  In addition, the threshold for the “Highly Compensated Employee” exemption, which allows a simplified duties test for high-salary workers, will be raised from $100,000 to $134,004.  The Final Rule also includes an automatic update mechanism that adjusts the minimum salary level every three years.  The first adjustment is scheduled for January 1, 2020, and initial estimates suggest it will raise the minimum salary level to $984 per week (or $51,168 per year).  One good piece of news for employers is that this new threshold is partly offset by a change in the Salary Basis test that allows employers to treat non-discretionary bonuses or commissions as up to 10% of the employee’s salary for minimum salary level purposes.

Another notable aspect of the Final rule is that it omits the proposed changes to the FLSA’s duties test.  As a result, an employee’s “primary duty” will continue to be the “main, principal or most important duty,” as determined on a qualitative, rather than quantitative, basis. In addition, the specific duties for executive, administrative, and professional employees remain largely unchanged.  Even so, this may be an opportune time for employers to evaluate employee responsibilities, as the duties test is often the most litigated issue in a challenge to an employee’s classification.  Ultimately, however, a person earning less than $47,476 after December 1, 2016 will not be exempt from being paid overtime irrespective of their duties.

Businesses with currently-exempt employees that qualify for overtime pay under the Final Rule face a difficult dilemma: act to keep those employees exempt, or convert them to non-exempt status.  Some options available to employers are:

(1) Doing Nothing: If your business does not have any employees working more than 40 hours per week, or who do not fall below the new minimum salary level, a change may be unnecessary.  While this would be the ideal situation, it may not be an option for many employers.

(2) Raising Salaries: If your business has employees paid just below the new threshold, or who regularly work overtime, the most cost-effective step may be to raise their salary above the Final Rule’s new threshold.  Alternatively, employers with non-unionized employees may attempt to rework employment contracts to mitigate the impact of the Final Rule, such as by drafting provisions whereby employees receive a weekly salary that includes a certain amount overtime.  

(3) Reorganizing Worker Schedules And/Or Worker Responsibilities: For some employers, it may be possible to modify employee work schedules or move responsibilities between employees to avoid overtime situations.  This could be as simple as staggering employee hours or shifting certain employees to a 10am to 6pm schedule instead of the more standard 9am to 5pm.

(4) Paying Overtime: Finally, employers may opt to simply pay overtime to their newly qualified employees.

These are only some of the options available to employers looking to adapt to the new regulations. However, before deciding on a course of action it is also important to consider the impact the choice may have on employee productivity and morale.  For example, raising wages above the new threshold for less experienced workers may cause resentment among more senior employees absent comparable raises.  Similarly, reassigning work responsibilities may be viewed as a demotion if not explained in the proper context.  In short, while employers have a wide variety of options for complying with the new FLSA overtime regulations, they should consult with their accountants and/or attorneys to ensure that they make the most effective choice for the employer, the employees, and the business at large.