On May 18, 2016, the Department of Labor (“DOL”) announced new overtime rules under the Federal Labor Standards Act (“FLSA”), giving employers until December 1, 2016, to comply. The rules increase the salary threshold over which employers may classify their employees as exempt under one of the white-collar exemptions—administrative, executive, or professional. The salary threshold under federal regulations had been $23,660, meaning that employees only had to earn at least $23,660 annually in order to qualify for one of these exemptions. The new rules double the annual salary threshold to $47,476.
This is an important increase, as employees who are classified as exempt are not entitled to overtime pay. The DOL estimates that under the previous salary threshold, only 7% of salaried workers were entitled to overtime pay. With the increase in the salary threshold, the DOL estimates that 35% of salaried workers will now be entitled to overtime pay. Department of Labor, “The New Overtime Rule & Working Women: By the Numbers,” available here. According to the DOL, the new rules will impact 4.2 million workers, 56% of whom are women, who will either gain new overtime protections or get a raise to the new salary threshold. Id. California employees will also see an increase in the salary threshold, although a less substantial one. California law already applies a salary threshold of $41,600 to qualify as exempt under a white-collar exemption. Thus, the DOL’s changes increase the minimum salary threshold for California employees by nearly $6,000.
Regarding the exemption for highly compensated employees (“HCE”), the total annual compensation level above which most white collar workers will be ineligible for overtime was raised to the 90th percentile of full-time salaried workers nationally, up from the current $100,000 to $134,004 a year. An HCE exemption may apply where the employee needs only to perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee to satisfy the exemption. Additionally, non-discretionary bonuses, incentive pay, or commissions can now be included to satisfy up to 10 percent of the salary threshold for non-HCE employees, provided these payments are made on at least a quarterly basis. Also, no changes were made to the existing “duties test” which determines whether white collar salaried workers earning more than the salary threshold are ineligible for overtime pay, due to the executive, administrative, or professional exemption.
Finally, the new rules establish a mechanism for automatically updating the salary threshold every three years to ensure that the threshold reflects workers’ earnings, instead of allowing a lengthy gap between updates, like the nearly twelve years that have passed since the DOL last updated them.
Bevin Allen Pike, Senior Counsel
CAPSTONE LAW APC