They’re heeeere. No, not a poltergeist, though for many they may be just as unsettling. We’re talking about the new minimum wage and overtime exemption regulations for white collar employees under the Fair Labor Standards Act (FLSA). The long-awaited Final Rule has been released and is scheduled for publication on May 23, 2016.
The Final Rule focuses primarily on salary and compensation levels for the executive, administrative, professional, outside sales and computer employee exemptions, which are the FLSA’s so-called white collar exemptions. Since the Final Rule is not identical to the proposed rule published on July 16, 2015, let’s look at some of the differences.
Effective Date: The effective date of the Final Rule is December 1, 2016. This gives employers more time than initially expected since the Solicitor of Labor previously indicated that the effective date would be 60 days after publication.
Minimum Salary: The Final Rule sets the initial standard salary level for the white collar exemptions at $913 per week or $47,476 annually. [The current salary level is $455 per week or $23,660 annually.] This is lower than expected because it’s calculated using Census data from the lowest-wage region (currently the South), rather than nationwide Census data.
Highly Compensated Employees (HCEs): The Final Rule sets the total annual compensation requirement for HCEs at $134,004, which is the annual equivalent of the 90th percentile of full-time salaried workers nationally. Under current regulations, the minimum salary requirement for HCEs is $100,000 annually.
Automatic Adjustments: Under the Final Rule, salary and compensation levels will automatically be adjusted every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption. The proposed rule provided for annual adjustments.
Duties Test: The proposed rule requested comments on whether changes need to be made to the duties test currently used to determine eligibility for the white-collar exemptions. However, the Final Rule did not make any changes to the standard duties test.
Though not included in the proposed rule, the Final Rule allows nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary test requirement. For example, bonuses for meeting set production goals, retention bonuses and commission payments based on a fixed formula. By contrast, discretionary bonuses are awarded at the employer’s sole discretion and not in accordance with any preannounced standards.
Under the Final Rule, if an employee does not earn enough in nondiscretionary bonuses and incentive payments in a given quarter to retain their exempt status, employers can make a “catch-up” payment at the end of the quarter. Employers have one pay period to make up for the shortfall (up to 10 percent of the standard salary level for the preceding 13 week period). Payments can only be allocated to the prior quarter, not the quarter in which it was paid. If an employer chooses not to make a catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the quarter. Employers cannot use nondiscretionary bonuses or incentive payments to satisfy the salary requirement for HCEs.
Despite legislative efforts to nullify the Final Rule, like the Protecting Workplace Advancement and Opportunity Act, employers should begin planning now to make sure they are ready to comply with the Final Rule beginning on December 1, 2016. Since the Final Rule is sure to bring a level uncertainty and confusion, employers may benefit from having Employment Practices Liability Insurance to protect against various employment-related claims. Limited coverage for wage and hour claims may be available.
Please contact us if you would like to learn more about protecting your business with employment practices liability insurance.
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