The U.S. Department of Labor (DOL) issued a final rule last night substantially increasing the annual salary an employee must earn to be exempt from overtime pay requirements. The final rule—which takes effect on December 1, 2016—will require sweeping changes to the employment relationships between employers and employees both this year and beyond.

The new rule increases the salary requirements for an exempt status, raising the annual threshold from $23,660 to $47,476 for professional, executive, administrative, and certain other employees who fall into another white collar overtime exemption. In other words, most employees must be paid overtime for working more than 40 hours in a week unless they earn a salary of at least $913 per week or $47,476 annually and primarily perform certain defined exempt duties. Moreover, an employee will not be eligible for the highly compensated exemption unless paid at least $134,004, up from $100,000 under the old rule. The salary threshold under the new rule will increase automatically every three years based on data from the U.S. Bureau of Labor Statistics. The increased thresholds will be published 150 days prior to taking effect.

Non-discretionary bonuses, incentive pay, or commissions may count for no more than a 10 percent credit against the new salary standard and must be paid quarterly. Surprisingly, no changes were made to any of the "duties tests" for the exemptions.

Employers must focus intently on implementing the necessary reforms and should be prepared to face aggressive enforcement by the DOL after the effective date. Accordingly, we recommend that employers consider the following steps:

  • Audit the Exemptions. Employers should conduct a comprehensive audit of positions and employees potentially impacted by the changes, focusing on employees who earn salaries in the $23,660 to $47,476 range, while keeping in mind anticipated automatic increases in the future.

  • Review Job Duties and Descriptions. It is a good time to identify any employees potentially misclassified as exempt, since reclassifications made this year are less likely to raise flags about past errors. Employers should review job descriptions to ensure that the primary duties of all exempt employees satisfy of one of the exemptions, which were not changed under the new rule. Part of this audit should include a comparison between the description and the employee’s actual duties to ensure the employee’s actual duties qualify.

  • Develop a Compliance Strategy. For each employee or classification affected by the final rule or identified as misclassified, employers should determine whether their interests are better served by raising salaries to the new minimum, adjusting duties, or reclassifying to nonexempt status and paying overtime. There are a number of factors relevant to this consideration, including the number of hours worked by the employee, the practicality of imposing overtime controls, budgets, the nature of the position, the broader effects any reclassification will have on the employer, career advancement, and staffing levels.

  • Plan Communications. An important part of a compliance strategy is determining how changes will be communicated to employees and crafting a careful message, keeping in mind that some employees will likely react negatively to these changes, particularly if they perceive a loss in compensation, autonomy, or status.

  • Review Policies. Employers should review their timekeeping and overtime policies and practices to determine where adjustments will be needed to comply with the final rule and to make sure adequate safeguards are in place to control overtime costs.

  • Additional Training. Employees reclassified as nonexempt, as well as managers and administrators, may need additional training regarding recording time and limitations on working overtime.

Ballard Spahr's Labor and Employment Group regularly assists clients with Fair Labor Standards Act compliance, audits, and litigation, and have extensive experience guiding employers through exemption audits and reclassifications.

Copyright © 2016 by Ballard Spahr LLP.
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