Ending months of speculation, the United States Department of Labor (DOL) on May 18, 2016, issued final revised rules implementing the so-called “white collar” exemptions to the Fair Labor Standards Act (FLSA). These new requirements will take effect December 1, 2016, and will only apply to employees classified as exempt under the executive, administrative or professional (EAP) categories. They will not affect the outside sales or computer professional categories, nor doctors, lawyers or teachers. The EAP exemptions contain three parts:
Although there were many questions as to how far the DOL would go in revising the various tests, and whether it would modify the duties tests, the agency limited its changes to a substantial increase to the minimum salary threshold and an allowance to the salary basis test providing that certain non-discretionary bonuses could be included in meeting that minimum salary. The present minimum salary threshold is $455 per week (or $23,660 per year). Under the new rules, that minimum salary will more than double to $913 per week (or $47,476 per year). There is an alternative test for certain highly compensated individuals who are paid at least $100,000 per year. The annual wage requirement for the alternative test will increase to $134,004 per year.
Under the new rules, employers who pay non-discretionary bonuses and incentives (such as commissions) are permitted to take credit for those payments up to 10 percent of the minimum weekly salary, provided the bonus or incentive is paid quarterly or more frequently. Thus, the employer can pay the employee 90 percent of the weekly minimum salary (or $821.70 per week), with the difference coming from the bonus or incentive. If the bonus or incentive is not sufficient to make up the difference, the employer must make a “catch-up” payment within one pay period of the end of the quarter in order to maintain the exemption. This special salary-plus-bonus/commission arrangement could allow for creative structuring of a bonus or incentive program so that any amounts in excess of the 10 percent in one quarter could be carried forward to cover for shortfalls in later quarters.
Highly compensated employees are not eligible for the 90 percent payment and must still receive a salary of at least $913 per week, with the difference being paid at least annually.
In the past, the minimum salary requirements only changed when the DOL saw fit to change them. Under the new rules, the minimum salary requirements will be reviewed, and if necessary, adjusted every three years starting January 1, 2020.
The increase to the minimum salary requirement is significant and many employers are wrestling with whether to meet that requirement and how to do so. While the options to maintain the exemption are fairly limited, there are a variety of options to consider should the employer decide not to meet the new salary threshold and convert the employee to non-exempt status.
Employers have about five months to make their decision and implement their plans. Should you need assistance, please feel free to contact any member of Warner Norcross + Judd’s Labor and Employment Practice Group.