Department of Labor Releases Revised Overtime Pay Regulations

May 18, 2016

On May 18, 2016, the U.S. Department of Labor pre-released its much-anticipated revisions to the rules defining which employees are "exempt" from overtime pay requirements under the Fair Labor Standards Act ("FLSA").  Vice President Joseph Biden announced the changes today in Columbus, Ohio.  The final rule is expected to be officially published in the Federal Register on May 19, 2016.

The revised regulations will significantly increase the minimum salary that employees must receive to qualify for the executive, administrative, professional, outside sales, and computer employee exemptions (the "white collar exemptions").  As a result, according to the Labor Department’s calculations, about 4.2 million workers who are exempt under current regulations will become eligible for overtime pay under the FLSA, costing employers an estimated $295.1 million per year.[1] 

The revised regulations make four significant changes to the current rules, which were last updated in 2004: 

First, the revised regulations will more than double the minimum salary level for the white collar exemptions from $455 per week ($23,660 per year) to $913 per week ($47,476 per year).[2]  The new salary level constitutes the 40th percentile of earnings for full-time salaried workers in the lowest-wage Census Region, which is currently the South.[3]  This change in the final rule came in response to criticism that the Labor Department’s original proposal of $970 per week ($50,440 per year) failed to account for lower salaries in certain regions and industries.[4]       

Second, the revised regulations will significantly increase the minimum salary level required for the highly-compensated exemption to the FLSA (the "HCE exemption") from $100,000 per year to $134,004 per year.[5]  (For employees with earnings at or above this salary level, the duties test for the white collar exemptions is significantly relaxed.[6])  The revised threshold is at the 90th percentile of earnings for full-time salaried workers nationwide.[7]

Third, the revised regulations will index these salary levels so that they will be updated automatically every three years (rather than annually, as originally proposed).[8]  Until now, the salary-basis threshold has been static, with no mechanism for automatic increases over time other than a notice-and-comment rulemaking.  The Labor Department will rely on the 40th percentile of earnings for full-time salaried workers in the lowest-wage Census Region to update the minimum salary for the white collar exemptions, and on the 90th percentile of earnings for full-time salaried workers nationwide to update the minimum salary for the HCE exemption.[9]  Based on historical wage growth, the Labor Department estimates that at the time of the first update on January 1, 2020, the white collar minimum salary level is likely to be approximately $984 per week ($51,168 per year) and the HCE minimum salary level is likely to be approximately $147,524 per year.[10]

Fourth, the revised regulations will permit employers for the first time to count nondiscretionary bonuses, incentive payments, and commissions toward up to 10 percent of the required minimum salary for the white collar exemptions, so long as employers pay those amounts on a quarterly or more frequent basis.[11]

The Labor Department had also solicited comments on potential changes to the duties tests for certain overtime exemptions, but ultimately did not implement any revisions to those tests at this time.[12]

The new regulations will take effect on December 1, 2016, providing employers with approximately 200 days to comply.[13]

   [1]   U.S. Dep’t of Labor, Wage and Hour Division, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees ("Final Rule"), FR Doc. 2016-11754, 9, 11 (Table ES1), 50, 219-20 (Table 2) (filed May 18, 2015) (to be codified at 29 C.F.R. part 541), available at https://federalregister.gov/a/2016-11754. 

   [2]   Id. at 5, 7, 44, 48-49.

   [3]   Id. at 7, 48-49.

   [4]   Id. at 6, 45, 57-63; see also U.S. Dep’t of Labor, Wage and Hour Division, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, Notice of Proposed Rulemaking, 80 Fed. Reg. 38,516, 38,517 n.1, 38,527 (July 6, 2015).

   [5]   Final Rule 6, 8, 132-34, 136-37.

   [6]   Id. at 6, 19; see also 29 C.F.R. § 541.601.

   [7]   Final Rule 8, 136-37.

   [8]   Id. at 8, 141-42; see also 80 Fed. Reg. 38,537.

   [9]   Final Rule 8, 142.

  [10]   Id. at 8, 481.

  [11]   Id. at 8-9, 125.

  [12]   Id. at 7, 9; see also 80 Fed. Reg. at 38,518.

  [13]   Final Rule 2, 30-31.