On May 18, 2016, the U.S. Department of Labor (DOL) issued its much-anticipated Final Rule amending the Fair Labor Standards Act (FLSA) regulations implementing the exemption from minimum wage and overtime pay for executive, administrative, and professional employees (the EAP exemption) and for highly compensated employees (the HCE exemption).
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
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.