After two years of discussion and comment from the public, employers and elected officials, the United State’s Department of Labor (“DOL”) announced the enactment of new regulations that radically change the number of executive, administrative and professional (“EAP”) salaried employees who will be eligible for overtime pay.
The new rules adopted by the DOL on May 18, 2016, revise the Fair Labor Standards Act (“FSLA”) and raise the minimum annual compensation level for determining whether a salaried employee is entitled to overtime pay. The new rules go into effect on December 1, 2016, and will be updated every three years.
Salary Threshold for Exempt Salaried Employees to Double
Under existing Federal law, salaried employees who make at least $23,660 per year ($455 a week) and meet DOL’s exempt employee duty rules are not entitled to overtime pay. This minimum threshold was last set in 2004. An employee who would otherwise be exempt from overtime, but makes less than $23,660 a year is entitled to overtime pay based on a 40 hour work week.
The new rules double the minimum threshold to $47,476 per year ($913 weekly). By raising the threshold minimum, the DOL anticipates that an additional 4 million workers will be entitled to overtime pay.
Salary Level Automatically Adjusts Every Three Years
The current $47,476 annual threshold was reached by using the 40th percent of earnings of full-time salaried workers in the lowest Federal Census Region, which is currently the South.
Under the DOL Rules, the threshold exempt salary level will be re-evaluated every three years. It will be updated to equal the 40th percentile of weekly earnings of full-time workers in the lowest-wage Census Region. Interestingly, the new rules do not appear to address whether the threshold could be lowered if the 40th percentile has a net drop from its previous standard. The first update will be made on January 1, 2020.
Highly Compensated Employee Exemption Is Also Increased
The new Rules also affect the thresholds for highly compensated employees (“HCE”). HCEs are exempt from overtime even if they do not meet all of the EAP exemption guidelines. The federal government also uses the HCE standards for determining a company’s eligibility for defined-benefit or defined-contribution plan for its employees. The classic example of a defined-contribution plan is an employer sponsored 401k plan. If the difference between salaries received by HCEs and lower compensated employees is too great, the company can lose the tax deduction it receives for sponsoring the defined benefit/contribution plan. To keep its tax deduction, the company may be forced to return to the HCE contributions made during a plan year. The returned money is taxed as income.
The current salary threshold for HCEs is $100,000. Under the new rules, an HCE will be defined as an employee who earns more than $134,004 per year. The HCE threshold will be updated every three years to match an annual equivalent of the 90th percentile of earnings for full-time salaried workers nationally. The adjustments will be automatic and will start on January 1, 2020.
Nondiscretionary Bonuses May Be Included in Salary Level Requirement
In the past, the DOL did not permit an employer to include nondiscretionary bonus payments when determining whether an employee’s salary met the EAP exemption threshold.
Under the new rules, the DOL permits nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary test requirement. “Nondiscretionary bonuses” are defined by the DOL to include incentive bonuses tied to productivity or profitability (e.g. a bonus based on the specified percentage of the profits generated by a business in the prior quarter).
Importantly, if the nondiscretionary bonus exceeds 10 percent of the threshold salary (i.e. greater than $4,747.60), the amount attributable toward the EAP standard salary level is capped at 10 percent of the required salary amount.
For an employer to receive credit for nondiscretionary bonuses and incentive payments (including commissions) toward a portion of the standard salary level test, the payments must be paid on a quarterly or more frequent basis.
What These Rules Mean For Employers
Employers have until December 1, 2016 to comply with the new rules. Employers should examine their payroll records now to determine which EAP employees will no longer be exempt. If a currently exempt EAP employee’s salary is close to the new threshold, it may make sense to consider raising the employee’s salary to maintain the employee’s exempt status. It is also an opportunity for employers to evaluate how to handle employees who will not qualify as exempt under the new rules. These employees may need to be classified as hourly employees and now be eligible for overtime. Finally, this also an excellent time to review the DOL’s exempt employees guidelines to ensure that the duties performed by EAP employees qualify them as exempt.
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