The U.S. Department of Labor (USDOL) announced adoption of 2016 final regulations changing the white-collar exemption requirements. The new regulations are set to take effect on December 1, 2016, giving employers approximately 200 days to get ready.
The new minimum salary threshold for the overtime exemptions will be $47,476 ($913/week) annually. This is up from $23,660 ($455/week). The new salary threshold for the highly compensated employee exemption is $134,004, up from $100,000. Non-discretionary bonuses and commissions can be counted toward as much as 10 percent of the salary threshold, as long as they are made on a quarterly or more frequent basis. Going forward, the salary thresholds will be automatically updated every three (3) years starting January 1, 2020, and indexed to the 40th percentile of full-time salaried workers in the lowest income region of the country (currently the South). The DOL did not make changes to the exempt duties tests.
These regulations may be the most controversial among the last-minute employment regulations and guidance streaming out of the current Administration because of the significant impact on large numbers of employers and employees across the country, particularly local businesses, nonprofits, public agencies (including higher education), hospitality, tourism, and retailers. The U.S. Congress could try to block the final rule using the Congressional Review Act that gives Congress the option to disapprove certain types of “economically significant” regulations before they go into effect. Several congressional representatives have introduced such legislation but it remains to be seen how much momentum exists to pass legislation on this rule and whether enactment can be done on a timetable to avoid a certain veto by President Obama before he leaves office.
Employers who have not already done so need to immediately initiate risk management and compliance planning by reviewing exempt positions and identifying options to minimize negative impacts on employee relations, direct payroll costs, indirect administrative costs, and general operations. Employers are strongly advised to do these analyses under the guidance of an experienced wage and hour attorney due to the complexity of potential issues and the availability of the attorney-client privilege to protect candid discussions involving legal advice and risk management.
With its final rule, the USDOL has created an expectation that employers will have to give more than 4 million managers and administrators a “government-mandated” pay increase. However, the USDOL has failed to adequately inform the public that individual compensation in the form of overtime pay does not have to result in overall increase from current compensation when employers reclassify positions as non-exempt. Employers are allowed to modify pay rates, benefits, and work hours to maintain existing compensation levels.
The USDOL has also largely ignored the adverse impacts that will likely occur with the implementation of this final rule. For example, currently exempt employees who are converted to non-exempt status will lose flexibility regarding working conditions and many may feel that they have been “demoted.” Employers will have to deal with these employee morale issues as well as significant hidden costs to plan, budget, implement, train workers, revise policies and procedures, reprogram payroll, and otherwise administer changes required by the new rules.