U.S. Department of Labor More Than Doubles Minimum Salary Levels for FLSA Overtime Exemptions

The Final Rule substantially raises the minimum salary level requirement for the EAP exemption to $913 a week (or $47,476 annually) and the total annual minimum compensation requirement for the HCE exemption to $134,004. The Final Rule becomes effective on December 1, 2016, at which time the initial increases to the EAP salary level and HCE total annual compensation requirement will take effect. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020. The EAP salary level will continue to be tied to the 40th percentile of wages for full-time salaried employees in the lowest wage Census Region, and the HCE compensation level will continue to be tied to the 90th percentile of wages for full-time salaried employees nationally. The DOL estimates that the Final Rule will impact 4.2 million exempt EAP employees—with 4.1 million becoming eligible for overtime and the remaining receiving raises to retain their exempt status. The DOL further estimates that more than half of those employees—56 percent—are women.

Key Provisions of the Final Rule

• Effective December 1st, the minimum salary required for the EAP exemption increases from $455 a week or $23,660 annually to $913 a week or $47,476 annually, calculated based on the 40th percentile of wages for full-time salaried employees in the lowest-wage Census Region.
• Effective December 1st, the minimum total annual compensation for the HCE exemption increases from $100,000 annually to $134,004 annually, calculated based on the 90th percentile of wages for full-time salaried employees nationally.
• These minimum salary and compensation thresholds will automatically update every three years beginning January 1, 2020, with the new level announced 150 days prior to the effective date.
• Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid at least quarterly to satisfy up to 10 percent of the salary level for the EAP exemption. The HCE exemption already allowed total annual compensation to be calculated by including commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during the year, without a 10 percent cap and without a quarterly payment requirement.
• The Final Rule does not alter the exemption for computer professional employees who are paid on an hourly basis at a rate of at least $27.63, but it clarifies that computer professionals paid on a salary basis must be paid at or above the minimum salary level for exempt EAP employees.
• The Final Rule makes no changes to the duties tests for the exemptions.
• The Final Rule adds provisions clarifying that, as long as an exempt employee’s pay includes a guarantee of at least the minimum weekly required amount, that employee’s compensation may be computed on an hourly, daily, shift or fee basis.
• The Final Rule includes a lower minimum salary level for employees in American Samoa ($767 per week, as of December 1, 2016), and it adds a provision exempting motion picture producing employees from the salary basis test if they are paid a base rate of at least $1,397 per week as of December 1, 2016 (with later adjustments every three years).
• The Final Rule includes no other new provisions with regional variations or industry exceptions, and it does not otherwise modify the FLSA regulations.

Background

The FLSA mandates that employers pay employees a minimum wage and pay premium overtime at 1.5 times their regular rate for all hours worked over 40 in a workweek, unless the employees are classified as exempt from these requirements. The EAP regulations, which were last updated in 2004, set forth tests for exemption from these requirements. For an employee to qualify for the EAP exemption, three tests must be met: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount, currently set at $455 per week (or $23,660 annually) (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations (the “duties test”). For an employee to qualify for the HCE exemption, the employee (1) must earn a total annual compensation of $100,000 or more, which includes at least $455 per week paid on a salary basis; (2) must have primary duty that includes performing office or non-manual work; and (3) must customarily and regularly perform at least one of the exempt duties of an EAP exempt employee.

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