DOL Announces Final Rule Updating FLSA Overtime Regulations: Now is the Time for Employers to Reassess Compliance

​by Rachelle Hill, Littler Mendelson
​
The Department of Labor (DOL) published its long-awaited Final Rule to the Fair Labor Standards Act (FLSA) overtime regulations regarding "white collar" overtime exemptions.  The final rule:

• Sets the minimum salary level for administrative, executive, and professional overtime expemtion at $913 per week ($47,476 annualized) - up from the current $455 per week ($23,660 annualized).

• Sets the total compensation level for highly-compensated employees at $134,004 annually - up from the current $100,000;
• Provides for automatic increases in the salary level every three years (beginning January 1, 2020) - with the minimum salary level indexed to the 40th percentile of full-time salary workers in the lowest wage Cenus region (the Southeast region), and the highly-compensated employees level indexed to the 90th percentile of national full time salary workers;
• Allows employers to count nondiscretionary bonuses and other incentive payments, including commissions, paid on at least a quarterly basis, for up to 10% of the minimum salary level;
• Allows for a quarterly make-up payment, although the details on the make-up payment are not yet available;
• Does not change any of the duties-based requirements (or the concurrent duties test) in the white-collar exemptions; and
• Does not change the salary basis test, other than increasing the salary level.

The Final Rule will not become effective until December 1, 2016, giving employers approximately 200 days to prepare for and implement changes to comply with the new regulations.
 
What options does an employer have for ensuring compliance with the changes? 
 
There are four primary options for compliance:

1. Raise individual employee's salaries;
2. Maintain current salaries, with overtime after 40 hours;
3. Maintain current salaries and limit time to 40 hours; or
4. Adjust employee wages 

Option 1: Raise Salaries
 
Employers may consider raising salaries to at or above the $47,476 level for employees whose salaries are close to the level, who regularly work overtime, and who otherwise meet the primary duties test (See WHD Fact Sheet # 17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sale Employees under the FLSA). This is an option for employees currently properly classified as exempt, meaning they previously hit the salary level and they meet the primary duties test.
 
Option 2: Maintain Current Salaries and Pay Overtime 
 
An employer may keep in place current salaries and pay overtime for hours above 40 per week. While the FLSA requires that employers pay time and a half for overtime, an employer is not required to pay employees on an hourly basis and can continue paying on a salary basis provided the overtime pay is paid and appropriately documented in records (See WHD Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA). 
 
Option 3: Maintain Current Salaries and Limit Hours to 40
 
Employers may continue with current salaries and limit employees to working 40 hours per week by readjusting work load or hiring new employees.  Employers choosing this option must be careful to avoid any "off the clock" issues, i.e. an employee at home at night responding to work e-mails on his/her phone.
 
Option 4: Adjust Employee Wages
 
Employers may adjust employees' wages to reallocate the total amount between regular wages and overtime so the amount paid remains the same.  The hourly rate would have to be a set rate paid according to time worked each week and cannot fluctuate.  To determine this, an employer can use the following formula:
 
Weekly Salary/(40 + (OT hours * 1.5))
 
For example, an employee works 45 hours per week at a salary of $37,000 ($711.54 per week).  Using this formula ($711.54/ (40+ (5 * 1.5)), an employer may pay an hour rate of $15 and overtime rate of $22.50, making his/her weekly rate $712.50.  Another option is to pay the employee a weekly salary of $600 per week and pay overtime for hours above 40.
 
What should an employer do now?
 
Employers should reassess their FLSA compliance now, determine what changes they will need to make, and determine how they will message the changes to employees. Employers should take advantage of this rare opportunity to correct classification issues with reduced risk of triggering litigation.  However, litigation may occur because of failing to act or failing to put in place proper systems to track hours, therefore it is critical for employers to start assessing compliance now and ensure that they properly message and document the changes.
 
FLSA & Final Rule Background
 
The FLSA is a federal statute that requires most employees to be paid, at least, the federal minimum wage and overtime pay at time and a half the regular rate of pay for all hours worked over 40.
 
The statute also provides an exemption from both minimum wage and overtime pay for employees employed as executive, administrative, professional, outside sales, computer, or highly compensated employees, the "white collar" exemptions.  To qualify for these exemptions an employee must meet the salary minimum and the "primary duties" test.
 
The Final Rule is in response to a 2014 directive from President Obama to "modernize and streamline the existing overtime regulations." The Obama Administration indicated that the current FLSA exemptions for overtime requirements had not kept up with inflation (the current salary level of $23,660 is below the poverty line level for a family of four).  The regulations haven't been updated since 2004 under the Bush Administration.
 
The entire final rule and preamble is available in PDF form (a lengthy 508 pages) on the Federal Register's website. The Department of Labor has published a summary guidance on its website including guidance aimed at private employers and higher education institutions.  ​