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On May 18, the U.S. Department of Labor (DOL) released the final rule increasing the salary threshold for white-collar exemptions to the federal overtime pay requirements under the Fair Labor Standards Act (FLSA) from $23,660 to $47,476. The DOL also announced it will automatically increase the threshold every three years, and that employers will need to be in compliance with the new rule by Dec. 1. 

The FLSA, enacted in 1938, requires employers to pay their employees a minimum wage set by the statute and “overtime” pay at a premium rate of time and a half of the employee’s regular hourly wage for every hour the employee works over 40 hours in a given week. The statute exempts certain categories of employees from these requirements. Under the “white collar” exemptions, executive, administrative and professional employees are exempt from the FLSA’s overtime and wage requirements if they are paid a salary (salary basis test) of at least $455 per week or $23,660 annually (minimum salary requirement), and primarily perform responsibilities that the DOL considers customary of professional, executive and administrative work (duties test). In 2004, the DOL added to the regulations a more streamlined duties test for employees paid a total annual compensation of at least $100,000; this is known as the highly compensated test for exemption, or the HCE.

On March 13, 2014, President Obama issued a memorandum directing the Secretary of Labor to make changes to the regulations governing exemptions to the FLSA’s overtime pay requirements for executive, administrative and professional employees (known as the white collar exemptions). On July 6, 2015, the DOL proposed increasing the overtime threshold to $50,440 per year, a 113 percent increase that would occur all at once in 2016, and in all areas of the country regardless of significant regional economic differences. The DOL also proposed automatic annual increases to the minimum salary threshold and requested comments on whether it should make changes to the duties test.

While an increase to the salary threshold is due, the DOL’s proposal was met with widespread concern from tens of thousands of small and large businesses, nonprofits, local governments, academic institutions and the Small Business Administration Office of Advocacy—all of which have asked the DOL to examine more closely the impact of the drastic and immediate increase and consider less harmful alternatives. The regulated community has emphasized that such drastic changes will do serious damage to people’s careers and workplace flexibility, new job opportunities and essential community services. 

While the salary threshold in the final rule was lowered to $47,476, this still amounts to a 100 percent increase that will take effect all at once this year. Furthermore, the threshold will automatically update every three years. Although this is an improvement from the proposal’s annual update, this provision does not take into account economic circumstances and could aggravate future economic downturns. Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the
lowest-wage Census region, estimated to be $51,168 in 2020. The final rule will allow up to 10 percent of the salary threshold to be met by non-discretionary bonuses, incentive pay or commissions, provided these payments are made at least on a quarterly basis. Lastly, the DOL did not make any changes to the duties test. It will post new salary levels 150 days in advance of their effective date, beginning Aug. 1, 2019.

The Protecting Workplace Advancement and Opportunity Act (S. 2707/H.R. 4773) has been proposed to require the DOL to examine the impact on stakeholders, including the public sector, before implementing any changes to the exemptions. The employer community is expected to redouble its efforts in support of this legislation and other solutions.

The DOL has posted several fact sheets, a Q&A document and other materials on the rule at dol.gov/WHD/overtime/final2016.

Basil Thompson is an associate at Ulman Public Policy. For more information, email basil@ulmanpolicy.com.

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