May 19, 2016

DOL Announces Final Rule on FLSA White Collar Exemptions

On May 18, 2016, President Obama and Labor Secretary Perez announced the publication of the Department of Labor’s final rule updating the overtime regulations under the Fair Labor Standards Act. The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be considered exempt from overtime requirements (i.e., the so-called “white collar exemptions”). The changes will go into effect on December 1, 2016, with future automatic increases to occur every three years, beginning January 1, 2020.

Key Changes of the Final Rule:

  • Sets the minimum salary level to claim the white collar exemption at $913 per week or $47,476 annually.
  • Sets the total annual compensation requirement for highly compensated employees (HCE’s) subject to a minimal duties test to $134,004, of which $913 per week must be paid on a salary basis. (Note that California does not have an exemption for HCE’s.)
  • Establishes a mechanism for automatically increasing the salary and compensation levels every three years to maintain the levels at the 40th percentile of full-time non-hourly workers in the region of the country where the salary level is lowest. For HCE’s, the base salary will be based on the 90th percentile of full-time non-hourly workers nationally.
  • Amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.

These rules will impact many California employees. Under California law, an employee is generally exempt from overtime if s/he earns at least double the state minimum wage for full-time employment. This is currently $800 per week ($41,600 annually), increasing to $880 per week ($45,760 annually) on January 1, 2017, when the minimum wage increases. Because the federal minimum has been considerably lower for a long time, the federal minimum has never been relevant for California employers, who have always needed to satisfy the more stringent California requirement. Under the new federal rule, California employers, and indeed all employers across the country, will have to pay anyone who earns less than $913 per week ($47,476 annually) overtime pay, unless they work in “agriculture.” 

“Agricultural” employees, unless covered by very limited exemptions, are subject to the minimum wage portion of the FLSA, but are exempt from the overtime provisions of the FLSA, thus the new rule won’t have an effect on “agricultural” employees. However, if an employee performs non-agricultural work at any time during the week, the exemption from overtime is void and the employee must be paid overtime for any hours over forty.

The Notice of Proposed Rulemaking on the overtime rule first appeared in the Federal Register last July. The DOL received over 270,000 comments in response from stakeholders on all sides. In response to those comments, the base salary level in the Final Rule is lower than the $970 per week ($50,440 per year) originally proposed. The proposed rule also called for annual automatic increase, while the Final Rule adjusts the salary every three years.

Despite these somewhat favorable changes, House and Senate Republicans have introduced legislation intended to halt the rule and send DOL back to the drawing board, but only after it has conducted an economic impact analysis, and issues a rule that comports with that analysis. However, this is a partisan bill that would surely be vetoed by any current or future Democratic president. Thus, employers should plan on the new rules going into effect as scheduled unless they hear otherwise.

Regardless of whether the new regulations go into effect or not, the new rule presents employers with a unique opportunity to audit employee classifications and make changes if necessary. For those employees who may be improperly classified as exempt from overtime, employers may consider changing their classifications to non-exempt referencing the DOL’s new regulations as the impetus for the change, which could potentially minimize any legal liability. Any such change should be reviewed with employment counsel.

Look for updates and announcements on an upcoming webinar in future editions of Western Growers Spotlight.

For further information, contact WG Vice President and General Counsel, Jason Resnick at (949) 885-2253.