The Department of Labor last week issued long-awaited regulations increasing the salary level that workers need to earn to qualify for the executive, administrative, and professional worker exemptions to the Fair Labor Standards Act’s (FLSA’s) overtime requirements. According to Labor Secretary Thomas Perez, the primary purpose of the new OT regulations is to ensure that middle class workers earn a middle class wage. Terry Bonnette, a partner at Detroit-based management labor and employment law firm Nemeth Law PC, explained the new rule.
“Currently, in addition to performing certain specified duties, workers must earn a weekly salary of $455 (or $23,660 annually) in order to qualify as exempt. If the worker meets both the duties test and the salary test, an employer does not have to pay overtime rates when the employee works overtime. However, beginning December 1, 2016, the new regulations increase the minimum salary needed to qualify to $913 per week (or $47,476 annually),” Bonnette said. “Workers who earn less than $913 per week will have to be paid overtime rates when they work overtime, regardless of the duties that they perform. The regulations also specify that the salary level needed to qualify will increase every three years, with the first increase coming on January 1, 2020.”
Key Provisions of the Regulations
The regulations focus primarily on updating the salary and compensation levels needed for workers to be exempt. Specifically, the regulations:
1) Set the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, which is $913 per week or $47,476 annually for a full-year worker.
2) Set the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004.
3) Establish a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure
that they continue to provide useful and effective measures for exemption.
4) Amend the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
5) Do not make any changes to the duties tests.
“If they have not already done so, employers should immediately review their compensation plans to determine whether currently exempt employees will still qualify for these exemptions when the salary level increases,” Bonnette said.
Bonnette also noted that in order for a worker to qualify under these exemptions the DOL generally requires that: (1) the salary is a fixed weekly salary that does not vary due to the quality or quantity of work performed (“salary basis test”); (2) any deduction from the fixed salary must be for reasons permitted by the FLSA; and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”).
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