The U.S. Department of Labor (DOL) published the final version of its new overtime regulations this morning, heralding a significant change to the exemption rules that is likely to disqualify millions of workers from their current exempt status before the end of this year.
The new rules, which will become effective on December 1, will more than double the salary level required for the so-called “white collar” exemptions under the Fair Labor Standards Act (FLSA) from $23,660 a year ($455 per week) to $47,476 a year ($913 per week). Most employees who earn less than the new required salary will be automatically non-exempt regardless of their job duties. The salary level required for FLSA’s “highly compensated employee” exemption also will increase from $100,000 to $134,004 annually.
In a significant departure from current methodology under which the required salary level remains static until further regulatory revision, the new rules require that the salary level for the white collar exemptions be increased automatically every three years to match the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. The DOL will publish updated rates at least 150 days before their effective date. The first automatic revision to the salary level will take effect on January 1, 2020.
The salary level for the highly compensated employee exemption likewise will be revised every three years to equal the 90th percentile of annual earnings of full-time salaried workers nationally.
The new regulations will allow employers to use nondiscretionary bonuses and incentive payments, such as productivity and profitability bonuses, and commissions, to satisfy up to 10 percent of the required salary level for white collar exemptions, as long as they are paid at least quarterly. The rules contain a catch-up provision that will allow employers to bring employees up to the required salary level for a calendar quarter if their bonuses or commissions for the quarter are lower than expected.
Millions of Workers Affected
About 4.2 million exempt employees will become non-exempt under the revised regulations, according to DOL estimates, “without some intervening action by their employers.” Also, the DOL believes that an additional 5.7 million workers who now earn sufficient salaries to qualify for exemptions, but who may not satisfy the duties tests despite being classified as exempt by their employers, will be reclassified as non-exempt under the new regulations because their non-exempt status will become clear without the need to examine their job duties. All told, DOL estimates suggest that the proposed changes potentially will affect more than 14 percent of the American workforce during fiscal year 2017.
Cost to Employers
The DOL predicts these changes will cost U.S. employers about $1.2 billion a year in “transfer of income between employers and employees in the form of higher earnings,” as well as about $295 million in “regulatory familiarization, adjustment costs, and managerial costs.”
Most of the workers who will lose exempt status under the new regulations are employed in professional and technical services, according to the DOL. Other significantly affected industries include health care, finance, retail trade, insurance, and educational services.
If you have questions about how the new rules will affect your business, contact the author of this alert or any member of the Steptoe & Johnson Labor & Employment Team.