The U.S. Department of Labor’s new regulations for determining whether white collar salaried employees are exempt from the minimum wage and overtime pay protections mandated by the Fair Labor Standards Act (FLSA) become effective on December 1, 2016.    Before that date, affected employers need to analyze and assess the composition of their workforce to determine how they will be responding to this new regulatory landscape and communicate those changes to impacted employees.

Background on the FLSA and the New Rules

To qualify for exemption from the FLSA under the current regulations, a white collar employee generally has to:

• 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”);
• be paid more than a specified weekly salary level (the “salary level test”); and
• primarily perform executive, administrative, or professional duties, as defined in the regulations (the “duties test”).

A slightly different exemption standard is used for certain highly compensated employees and certain classifications of employees (such as doctors and teachers) are exempt from the FLSA without regard to the salary basis or salary level tests.

Under the new rules, the salary basis test and the duties test will remain unchanged.  However, the threshold for the salary level test has been doubled from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) and the salary threshold for the highly compensated employee exemption has been raised from $100,000 to $134,004.  In addition, both of these salary thresholds will be subject to automatic adjustments every three years (beginning January 1, 2020). Finally, the new rules provide that up to 10% of the standard salary level can come from non-discretionary bonuses, incentive payments, and commissions, paid at least quarterly.

Alternatives and Issues to Consider

Employers have a range of options to consider for each employee newly entitled to overtime pay, including:

• increasing the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
• paying an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked;
• reducing or eliminating overtime hours;
• reducing the amount of pay allocated to base salary and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
• a combination of any of these.

Nothing in the new rule requires employers to change employees’ pay to hourly from salaried, even if the employees’ classification changes from exempt to overtime eligible. This is important given that employees might view a decision to re-classify their position from exempt to non-exempt as a demotion. If a decision is made to re-classify, employers should explain to affected employees that the change results from new regulations, that it is based only on the employee’s compensation level, and that the change affects all similarly compensated employees nationwide in the same manner.

Special Concerns for Government Contractors

Government contractors will also need to assess the impact of the new rule on their existing and anticipated contracts with the federal government.   For example, some contractors may want to consider seeking adjustment to existing contracts to address the cost impact of the new regulations.  In addition, because white collar employees exempt from the FLSA are also exempt from the Service Contract Act (SCA), one consequential impact of the new rules will be broadened applicability of the SCA.

For additional information on the new rules, go to:  https://www.dol.gov/whd/overtime/final2016/  and  http://webapps.dol.gov/elaws/whd/flsa/overtime/menu.htm

For more information on this topic, please contact MWL Counsel, Peter A. Fish