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July 19, 2016

Tick Tock . . . the FLSA Clock is Running


I know what you are thinking, another article on the new FLSA regulations, but it is important—and besides, my articles are better than all the other ones you have read. So, here we go:

As you all probably know, in May the Wage Hour Division of the US Department of Labor issued its long-awaited revisions to the FLSA. The new regulations really only make three substantive changes to the old test for who can and who cannot be exempt. Before we get to those, let’s do a quick recap:

In order to be exempt from overtime under the white collar exemptions an employee must meet three tests:
  • The salary basis test means that an employee is paid a fixed salary in each work week that does not vary depending on the quality or quantity of the employee’s work. This one is unchanged in the new regulations.
  • The duties test is what the exempt employee’s job is. Or what the employee does. There are executive, administrative, professional, outside sales, and computer professional duties tests. Again, no change in the new regulations. What has changed is the salary level test. We all knew the salary level test was going up. The big question was how much.
40th Percentile Salary Level

The Department of Labor had originally proposed that the salary level be set at the “40th percentile of all full-time salaried employees in the US.” That is not what the final regulations say. The DOL stuck to its 40th percentile measure, but to throw a small bone to employers, the final Regulations set the 40th percentile based on earnings of full-time salaried workers in the lowest wage census region. This time, and for the next three years (I’ll get to that in a second), that’s the Southern States. And that means the new salary level test is $913 per workweek, or $47,476 annually.

Highly Compensated

There is also what is known as the “highly compensated” test, which gives employers a bit of a break on the duties test. The current highly compensated rate is $100,000 year. So any employee making more than $100k is considered exempt and there is less emphasis, although still some, on the employee’s duties. The highly compensated test remains the same as in the preliminary Regulations. It’s set at 90% of full-time salaried workers in the country and comes out to $134,004 annually.

Non-Discretionary Bonuses and Incentives

The DOL also threw another small bone to employers. The final Regulations also allow employers to include non-discretionary bonuses and other incentive payments including commissions to satisfy up to 10% of the salary level. But in order to be able to apply this 10% to the weekly salary, the incentive compensation must be “non-discretionary” and it must be paid at least quarterly.

Resetting the Levels Every Three Years

Finally, in order to avoid the notice and comment hassle and having to do this all again in a couple of years, there is also an automatic updating provision in the Regulations. Beginning on January 1, 2020, the salary level tests will be reset every three years.

The new Regulations go into effect December 1, 2016. So if you haven’t started thinking about what you’re going to do already, now is the time to do it.

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