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Client Alert: White Collar Exemption to FLSA
The United Sates Department of Labor has announced that it will publish a Final Rule to update the regulations governing the exemption of executive, administrative, and professional employees from the minimum wage and overtime provisions of the Fair Labor Standards Act (“FLSA”). The Final Rule follows a directive from President Obama to the Department of Labor, issued in 2014, to update the regulations governing the exemption, often referred to as the “White Collar” or “EAP” exemption, and will go into effect on December 1, 2016.
Under the FLSA, non-exempt employees must be paid time-and-a-half for all hours worked over 40 in a week. Certain employees may, however, qualify for an exemption to this overtime requirement if they meet certain prerequisites. One such exemption is the White Collar exemption addressed by the Final Rule. To qualify for the White Collar exemption, an employee must meet three criteria: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“Salary Basis Test”); (2) the employee’s standard salary must meet a minimum specified amount (“Salary Level Test”); and (3) the employee’s primary job duties must involve executive, administrative, or professional duties, as defined by regulations (“Duties Test”).
As explained by the Department of Labor, the Final Rule more than doubles the standard salary level required for an employee to satisfy the White Collar exemption, extending overtime benefits to millions of workers currently not entitled to them under the law. Under the Final Rule, the salary threshold is set at the 40th percentile of earnings of full-time salaried workers in the lowest income Census region. As a result, when the Final Rule becomes effective, the standard salary level will increase from $455 dollars per week ($23,660 annually) to $913 per week ($47,467 annually). In addition, under the Final Rule, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level, provided these payments are made at least quarterly.
The Final Rule also sets the total annual compensation required for “Highly Compensated Employees” to an annual equivalent of the 90th percentile of full-time salaried workers nationally, raising this threshold from $100,000 to $134,004 annually. Under the FLSA, Highly Compensated Employees need only make a minimal showing with respect to their duties to qualify for the White Collar exemption.
The Final Rule also provides for a mechanism to automatically update the salary and compensation levels every three years to maintain the levels at the percentiles set forth in the rule.
When the Final Rule goes into effect, many employees who are currently exempt from the FLSA’s minimum wage and overtime requirements will no longer qualify for the White Collar exemption, entitling them to overtime pay for hours worked over 40 in a week. Employers should look at all employees who will fall into this category to determine if they regularly work overtime. For those employees who do regularly work overtime, employers have several options for compliance. The Department of Labor has issued technical guidance documents to assist private employers, non-profit employers, and higher education institutions in complying with the Final Rule.
This alert is designed to provide a useful overview; it does not contain advice on any particular issue. Questions about specific situations or areas of application should be addressed to an employment attorney.