DOL’s new salary rule is a mixed bag for employers

Adding to the recent flurry of federal regulatory activity that has impacted businesses, on Wednesday, May 18, 2016, the United States Department of Labor (DOL) issued a final rule that raises the salary threshold for exempt employees under the Fair Labor Standards Act (FLSA).  Last changed in 2004, the salary threshold is one part of a two-part test that employers must satisfy to classify a particular employee as exempt from the FLSA’s overtime requirements.  The changes introduced by the new rule go into effect on December 1, 2016.

The new rule raises the salary threshold from $23,660 annually or $455 per workweek to $47,476 annually or $913 per workweek.  While this figure is lower than that included by the DOL when it first proposed a change in the rule back in June 2015, the new threshold is over 50% higher and is expected to cover some 4.2 million employees, according to the DOL.  However, in what can be considered a small victory for employers, the DOL listened to all the public comment during the past year and for the first time, is allowing employers to count nondiscretionary bonuses, incentives, and commissions to satisfy no more than 10% of the required salary, provided that such payments are made on a quarterly or more frequent basis.  What this means, for example, is that an employer who pays a $1,000 non-discretionary bonus on a quarterly basis can add that amount to the employee’s $11,000 regular salary for the quarter and still satisfy the rule’s requirements.

As expected, the rule made no changes to the duties part of the two-part test.  As such, generally speaking, to qualify for an exemption to the FLSA’s overtime requirements after the new rule takes effect, employees must be paid on a salary basis of at least $913 per workweek and perform the duties of an executive, administrative, professional, outside sales, or computer employee, as set forth in the FLSA’s regulations.

Also included in the rule’s changes was an increase in the salary threshold for highly compensated employees, from $100,000 to $134,000 annually.  Finally, the rule provides that each of these amounts will be adjusted automatically every three years, which is another victory for employers, given that the DOL had initially proposed annual increases.

According to the DOL, the new rule is an attempt by the federal government to address what it perceives as a long time misapplication of the FLSA’s exemptions.  However, the rule represents yet another added burden on employers already struggling to keep up with ever-increasing regulatory demands.  It also presents a stark choice to many employers of increased costs in the form of higher pay, whether by increasing an employee’s salary in order to satisfy the new threshold or in the payment of overtime, or lower productivity in the form of shorter hours or worse, a reduction in workforce, in order to minimize the amount of overtime work performed and paid out.  If they have not already done so, employers are strongly encouraged to spend the next 2-3 months examining their workforce to determine how many employees will be affected by the new threshold and then calculate the costs, both financial and operational, to each option noted above.  Once a decision is made, employers will need sufficient time in advance of the December 1st deadline to implement the action and meet with all affected employees.  In the end, many employers may find that the best option is to simply convert the employee’s current salary to an hourly rate going forward, which would effectively keep the employees at the same earnings level, but careful thought and analysis needs to be taken with respect to this or any other option.