We have been working for months – alongside a broad coalition that includes small businesses, non-profits and universities – to moderate the Department of Labor’s (DOL) proposed rule to increase the salaries test used to determine whether an employee qualifies for overtime. The DOL’s original proposal would have increased the threshold of $23,660 to $50,440 annually – a 113 percent increase – without accounting for regional differences in cost of living.
On May 18, the Department of Labor released its Final Rule with only modest changes. While we are still evaluating the Final Rule, this is what you need to know:
The Salary Threshold Will Increase from $23,660 to $47,476
In the Final Rule, the Labor Department set the salary threshold to the 40th percentile of weekly earnings for full-time salaried workers in the lowest wage Census Region – the Southeast – rather than based on national data as originally proposed. This sets the new salary threshold to $47,476 to be implemented December 1, 2016. Although nearly $3,000 less than the proposed $50,440 threshold, it is still a 100% increase from the current threshold of $23,660.
The Standard Salary Level Will Automatically Update Every Three Years
The Department’s proposed rule called for an automatic annual update to the salary threshold. In the Final Rule, the Department stated that the salaries test will be updated every three years and will be tied to the 40th percentile of salaried workers in the lowest-wage region (likely to remain the Southeast).
Employers Can Count Nondiscretionary Bonuses, Incentives, and Commissions Toward Salary Level
For the first time, the new standard would permit employers to count nondiscretionary bonuses, incentives and commissions toward up to 10 percent of the required salary level for the standard exemption, as long as those amounts are paid on a quarterly (or more frequently) basis. In any given quarter – if an employee does not earn enough in nondiscretionary or incentive pay, the Final Rule permits employers to make a “catch-up” payment to maintain the employee’s exempt status.
We are very disappointed with the DOL’s Final Rule, but was not surprised given the politics around this issue in the remaining months of an Obama Administration and with less than six months until the November presidential and congressional elections. Unfortunately, rather than increasing the threshold to a level that would bring exempt employees’ salaries up, many businesses and non-profits may have to absorb these mandated costs through a change in operations that could hurt employees, such a as moving full-time positions into part-time positions.
Several efforts are underway in Congress to overturn or stop the implementation of this Final Rule, and some aspects of the rule may be challenged in court. We will continue to explore options to moderate the rule. But at this time, given the President’s ability to use the veto pen, a legislative solution is a long-shot.
We will keep you posted of any new developments. If you have any questions please contact Kristina Zaumseil.