DOL Issues Final Rules That Significantly Restrict The White Collar Exemptions To The FLSA’s Overtime Requirements

The federal Fair Labor Standards Act (FLSA) mandates that employees be paid one and one-half times their standard hourly rate of pay for all hours worked in excess of 40 hours in a given workweek. There are several exceptions to that overtime requirement, including an exemption for “white collar workers” – – those classified as Executive, Administrative and Professional employees. Pursuant to its rulemaking authority, the United States Department of Labor (DOL) adopted a two- part test that must be met before an employee can be properly categorized as Executive, Administrative and Professional employee exempt from overtime requirements. . Under the test, the employee must meet both a “duties test” and a “salary basis test” to satisfy one of the white collar exemptions. On May 16, 2016 the DOL finally issued long-anticipated new regulations that substantially increase the salary basis requirement to meet the white collar exemptions, resulting in many employees being stripped of their previously exempt status and now making them eligible for overtime compensation.

In the 1970s the DOL adopted regulations mandating that all Executive, Administrative and Professional employees had to earn a minimum of $455 per week, or $23,660, per year to satisfy the salary basis test for a white collar exemption, a salary level that remained untouched for decades. However, under the new regulations that will take effect on December 1, 2016, the salary basis test has been essentially doubled to $913 per week, or $47,476 per year. Regardless of whether the employee can satisfy the duties test for a white collar exemption, if the employee’s compensation falls below this increased salary basis, the exemption from overtime requirements is not met.

Another target of the new regulations is the Highly Compensated Employee exemption. Presently, certain highly-compensated employees were exempt from the overtime requirements so long as they were paid at least $100,000 and satisfied a less-stringent duties test. Under the new regulations, the minimum salary basis test for that exemption has been substantially increased to $134,004.

Finally, the regulations establish a mechanism for automatically updating the salary levels every three years to maintain them at set percentiles of wages according to U.S. Census data, thereby ensuring that the salary basis test keeps pace with wage increases in the marketplace.

It is estimated that these changes in federal regulations will affect more than 130,000 employees working in the State of New Jersey, and 4 million workers nationwide.

How does this affect your business? If you have categorized any employees as Executive, Administrative or Professional employees exempt from the overtime requirements, now is the time to review their compensation. As of December 1, 2016, those employees who are not being paid at least $913 per week or $47,476 per year, will no longer qualify as white collar employees, and consequently, will be entitled to overtime payments for all hours worked in excess of 40 hours in any given workweek. The same is true for those categorized as Highly Compensated Employees, who must make in excess of $134,000 to preserve the exemption. In addition, employers must also keep in mind that while the multiple criteria of the “duties test” where not impacted by the new regulations, these criteria must also be satisfied to qualify for the exemption going forward.

As a result of the regulatory changes, many employers are now faced with a difficult choice: increasing employee’s salaries to preserve their exempt status, or incurring the cost of overtime and implementing mechanisms aimed at minimizing the overtime hours worked by these newly non-exempt employees.

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