On May 18, 2016, the U.S. Department of Labor issued a highly-anticipated final rule that makes millions of workers eligible for overtime pay. The rule substantially changes the requirements for classifying “white collar” employees as “exempt” under the Fair Labor Standards Act, and will require employers to either significantly raise affected employees’ salaries or reclassify them as non-exempt and begin paying them overtime. The rule takes effect on December 1, 2016. Employers should act now to ensure they will be in compliance with the new rule by the effective date.

Under current federal law, to be classified as exempt from overtime under the so-called “white collar” executive, administrative, or professional exemptions, an employee must meet three essential requirements: (1) satisfy a “duties test” (i.e., have and perform certain white collar job duties); (2) be paid on a salary or fee basis (as opposed to an hourly basis); and (3) be paid at least $455 per week. If an employee is “highly compensated,” meaning that he or she earns at least $100,000 in total annual compensation, the employee may also be considered exempt under a relaxed version of the duties test. On July 6, 2015, DOL issued a proposed rule significantly raising the dollar thresholds (minimum salary amounts) necessary to be exempt under the white collar and highly-compensated employee exemptions. On May 18, 2016, after receiving hundreds of thousands of comments in response to the proposed rule, DOL released a final rule that largely adopts the content of the proposed rule. The final rule makes four major changes from current law:

1. White Collar Salary Threshold: The minimum salary level necessary to be exempt will increase by approximately 100% from current levels. Specifically, the salary basis minimum will rise from $455 per week (or $23,660 per year) to $913 per week (or $47,476 per year).

2. Highly Compensated Employees: The total annual compensation required for an employee to qualify as a “highly compensated employee” will increase from $100,000 per year to $134,004 per year.

3. Automatic Updating: Beginning on January 1, 2020 and every three years thereafter, the above dollar levels will automatically update as follows: (1) the salary threshold for white collar exemptions will updated to equal the salary level of the 40th percentile of full-time salaried workers in the lowest wage region of the Census (estimated to be $51,168 in 2020); (2) the highly compensated employee exemption compensation level will be updated to equal the earnings of the 90th percentile of full-time salary workers nationally (estimated to be $147,524 in 2020). DOL will publish three updated compensation levels 150 days in advance of their effective date.

4. Bonuses and Commissions: Employers may use non-discretionary bonuses, incentive pay, or commissions that are paid on at least a quarterly
basis to count toward up to 10% of the salary threshold necessary to qualify  for a white-collar exemption. In certain respects, the final rule is modestly more favorable to employers than the proposed rule. In the proposed rule, the salary threshold necessary  to qualify as exempt would have exceeded $50,000, and the automatic dollar updates would have begun in 2017 and updated annually rather than being delayed until 2020 and updating every three years. The proposed rule also would not have permitted bonuses and commission to count toward the salary threshold. Additionally, the effective date of the final rule—December  1, 2016—is significantly later than many experts expected. On the other hand, the final rules is harsher than the proposed rule in that it sets the highly compensated employee compensation threshold at $134,004 per year rather than $122,524.

Although the final rule provides some relief from the proposed rule, it will nonetheless be a substantial burden to employers. The final rule will have two major impacts:

• Employees who earn less than $47,476 per year will no longer be eligible for the white collar exemptions (even if they are presently classified as exempt) unless their salary is increased.
• Employees who earn less than $130,004 per year will no longer be eligible for the highly compensated exemption unless their salary is
increased.

According to DOL’s estimates, the new rule will impact millions of workers and thus will affect virtually every employer in the United States. Employers should therefore begin taking steps now to get into compliance before the rule takes effect on December 1, 2016, such as:

• Identify all employees impacted by the rule (i.e., employees currently classified as exempt under a white collar exemption who earn less than the new salary thresholds).
• Determine what action to take with respect to each affected employee, such as whether to reclassify the employee as nonexempt, raise the employee’s salary to maintain exempt status, consider whether the employee qualifies for another FLSA exemption that does not require the employee to meet the new salary basis requirement (such as the hourly computer professional exemption), or conduct restructuring or reassignment of work.
• Consider whether to allow or adjust flexible or remote work schedules for exempt employees who become nonexempt, including whether to allow such employees to maintain use of a company cell phone or remote e-mail/network access. Remote working can raise substantial complications for nonexempt employees under the FLSA, such as requiring an employer to pay for the time an employee spends responding to e-mails at night (even if the employee is not asked to do so), which can create unexpected overtime payment obligations.
• Consider whether to adjust fringe benefits to take into account increased payroll costs imposed by the new rule.
• If adjusting salaries or benefits, conducting layoffs, or taking related action as a result of the rule, ensure that all actions are nondiscriminatory and otherwise comply with applicable legal requirements, including providing WARN Act notices and complying with the release requirements under the Age Discrimination in
Employment Act.
• Consider conducting a comprehensive wage and hour audit to correct any current FLSA misclassification issues.
• Conduct training for newly-nonexempt employees to explain their obligation to track their hours worked and your expectations for working (or not working) overtime.

Employers also need to consider their obligations under state wage and hour law which may differ from and impose additional requirements not included in the FLSA.

For more information about the new rule or its expected impacts or any other legal issues in the workplace, contact the authors of this article or the Hogan Lovells lawyer with whom you work.