The Department of Labor (DOL) announced the final rule on changes to the “white collar” exemptions under the Fair Labor Standards Act (FLSA) on May 18, 2016. The final rule is effective Dec. 1, 2016.
To qualify for certain white collar exemptions, an employee must meet a salary basis test, a salary level test and a duties test. An employee must meet all three tests in order to be exempt from FLSA minimum wage or overtime pay requirements.
The final rule only changes the minimum salary threshold required in order to satisfy the administrative, executive and professional employee exemptions. The final rule also increases the salary threshold for highly compensated employees. The final rule does not make any changes to the primary duties test under the white collar exemptions. In addition, the final rule does not make any changes to the other various FLSA exemptions.
Effective Dec. 1, 2016, the minimum salary level an employee must be paid under the administrative, executive or professional exemption is $47,476 annually ($913 per week). In addition, the minimum salary level is going to be automatically adjusted every three years.
The first step many employers must take is to evaluate the positions that may be affected by the final rule and determine whether or not these positions would require a salary increase to maintain the exemption.
Employers may choose to reclassify employees who are making below $47,476 to nonexempt (rather than increasing salaries). This classification change may have rippling effects on the employee, beyond the method in which they are paid. For example, the classification change might make some employees ineligible for certain benefits. Employers might also have to limit remote work and flexible scheduling.
Conversely, an employer that chooses to increase employee salaries should be cognizant of potential wage compression issues.
There are many other issues to examine when determining how to address changes required due to the final rule. Each employer’s response will be different depending on its specific circumstances. Some employers may need to make limited changes, if any at all. Others may need to consider a complete revamp of current pay policies, pay grades and worker classifications.
Employers that are facing likely reclassification of employees should prepare an effective communication plan. Many employees will view the loss of exempt level status as a demotion. This will be especially true if the classification change removes other perks or benefits that the employee is accustomed to.