On May 18, the Department of Labor (DOL) released the new Fair Labor Standards Act (FLSA) final rule on employee classification and overtime pay.
Employers had braced for the final rule ever since the proposed rule was published on July 6, 2015. Many employers were jolted by the date of the final rule’s release, because the DOL had hinted that the rule wouldn’t be released until July. However, while its early release may have been an unpleasant surprise, the final rule does contain some good news for employers.
First, the final rule includes a more generous deadline for compliance than anticipated. While the DOL had signaled that employers might be given only 60 days to comply with the rule after its release, the actual final rule allows for 120 days. Employers will have until December 1, 2016 to achieve compliance.
Additionally, while the proposed rule floated a new exemption threshold of $970 per week (or $50,440 annually) the final rule slightly reduced the threshold to $921 per week (or $47,892 annually). The reduction is due to a change in the DOL’s calculation methodology in response to public comment. Instead of basing the threshold on the fortieth percentile of earnings of full-time exempt workers across the United States, the DOL pegged the threshold to the fortieth percentile of earnings of full-time exempt workers in the lowest-wage Census Region—currently the South. The final rule explains: “salaries do not change at the same rate nationwide, and this modification will ensure that any future increase in earnings will only impact the standard salary level to the extent that those gains are also realized by employees in the lowest-wage Census Region.”
Also, the salary level will be updated every three years, with the first update taking place on January 1, 2020. Prior to the final rule, the salary level had not been updated since 2004. The proposed rule recommended annual updates to the salary level, but spacing out updates to once every three years will ease the administrative burden on employers of re-evaluating each employee’s salary, while ensuring that employers won’t be blindsided by sudden drastic jumps in the salary level that might occur over a longer period of time. The final rule predicts, based on historical wage growth in the South Census Region, that the salary level will increase to about $984 per week (or $51,168 annually) in 2020.
More good news for employers: for the first time, there is a small amount of wiggle room in the salary level test. Nondiscretionary bonuses, incentive payments and commissions, paid on at least a quarterly basis, can now comprise up to 10 percent of the required salary threshold. However, discretionary bonuses and the value of other benefits (like room and board, health insurance premium payments or retirement plan contributions) cannot be used to make up the threshold.