Department Of Labor Issues Final Rule To Double The Minimum Salary Floor For Federal Overtime Exemptions, Effective December 1, 2016

Author: Regina Silva

On May 18, 2016, the Department of Labor (“DOL”) issued its final rule updating the overtime regulations, defining and delimiting the exemptions for the executive, administrative, professional, and outside computer employees under the Fair Labor Standards Act.

Key provisions of the Final Rule include the following:

  1. Set the salary level at $913 per week, or $47, 476 annually for exempt employees;
  2. Set the total annual compensation requirement for “highly compensated employees,” subject to a minimal duties test, at $134,004; and
  3. Establishes a mechanism for automatically updating the salary and compensation requirements every three years by maintaining the earnings percentiles set forth in the Final Rule to prevent the thresholds from becoming outdated.

Employers may satisfy up to 10% of the standard salary requirements with nondiscretionary bonuses, incentive payments, and commissions, provided these forms of compensations are paid at least on a quarterly basis.

Currently, in California, the salary floor for exempt employees is two times the minimum wage (or $800/week).  Hence, the changes to federal law will require California employers, who are paying their salary employees between $800 to under $913/week, to increase the salary wages paid to its exempt employees before December 1, 2016.  As this increase in pay could have a substantial impact on California employers, the only other option would be to reclassify its exempt employees to non-exempt.

Should an Employer in California decide to reclassify its exempt employees to non-exempt in anticipation of the federal law, we recommend an Employer begin developing its plan for reclassification.  In setting the hourly wage for exempt employees, the Employer will need to consider how many hours realistically the exempt employee has been working every week and how much that will mean in overtime pay.  If the exempt employee works a significant number of overtime hours per week, their hourly pay will need to be set lower than what the hourly rate would be if the weekly salary pay was divided by 40 hours.

For example, if the exempt employee is currently paid exactly 2x the minimum wage, ($800/week, which equates to $41,600/year) and he/she is reclassified to non-exempt at an hourly rate of $20, but that formerly exempt employee works 5 hours every week in overtime, he/she would end up recieving $950/week, or $49,400/year.  This would result in a yearly pay above what is even required by the new federal regulations.  Hence, in deciding where to set the reclassified employee’s hourly rate, Employers need to assess how many overtime hours are worked by that employee and how much pay that equates to per week in order to determine an hourly rate equal to what the currently exempt employee is receiving in pay.

In addition, if an Employer decides to reclassify its exempt employees to non-exempt status, it will need to ensure the reclassified non-exempt employees are filling out timesheets/timecards, clocking out for the meal/rest breaks, and paid for any other required premium rates.

This is a good time for all California employers to review the exempt employee positions in their Company to ensure the employees are properly classified as exempt and if it would be beneficial to reclassify certain positions in light of these upcoming federal changes.

ABOUT THE AUTHOR: Ms. Silva is a graduate of University of the Pacific.  She is Director of Employment Practices in the firm’s Employment Practices Group.  She is a former prosecutor and has considerable trial experience.  Contact her at rsilva@tysonmendes.com

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