On May 18, 2016 the Department of Labor issued long awaited changes to the Federal rules setting forth the requirements for employees to qualify as exempt under the white collar exemptions. Exempt employees are “exempt” from some labor laws governing employees, such as overtime pay. Exempt employees are designated as such because they are “exempt” from certain wage and hour requirements due to their duties and level of pay (more information about exempt employees can be found here). Generally speaking, in order to qualify as an exempt employee, the employee must meet (1) a salary basis test and (2) a duties test. If the employee does not earn a high enough level of pay, or does not perform managerial duties for a certain percentage of their work time, the employee cannot qualify as exempt, and would be entitled to overtime pay and other labor law protections.
The DOL reviewed both the salary basis test and the duties test to “update and modernize the regulations governing the exemption of executive, administrative and professional (‘EAP’) employees” from the minimum wage and overtime pay protections of the Fair Labor Standards Act (“FLSA”). The DOL’s Final Rule issued on May 18, 2016 makes the following changes to the FLSA requirements necessary for employees to qualify as an exempt executive, administrative, or professional employee:
- Exempt professional employees must earn at least $913 per week, or $47,476 annually for a full-year worker. This is an increase from the $455 per week, or $23,660 annually for a full-year employee that is currently required under federal law.
- The higher salary requirement is effective December 1, 2016.
- The salary level that must be paid to employees to meet the salary basis test under federal law will increase automatically every three years. Therefore, the first increase from the amount set forth above will take effect on January 1, 2020.
- Employers may count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the salary requirement. The nondiscretionary bonuses and incentive payments must be paid on a quarterly or more frequent basis in order to apply. Examples of nondiscretionary bonuses include bonuses set for meeting production levels, retention bonuses, and commissions based on a fixed formula. Discretionary bonuses, such as bonuses provided to employees at the employer’s sole discretion and not according to predetermined standards cannot apply towards this 10 percent requirement. Therefore, tips cannot be including when calculating the amount of salary the employee earns to meet the salary requirement pay.
- The Final Rule also allows employers to make “catch-up” payments to employees if they do not receive enough compensation in nondiscretionary bonuses in a given quarter to remain exempt.
- There is no change in the standard duties test.
- Set the total annual compensation requirement for highly compensated employees (HCE) subject to a minimum duties test to at least $134, 004. The pay requirements for HCEs are effective as of December 1, 2016, and will also be reviewed and increased automatically every three years.
It is important to note for California employers that these changes apply to the FLSA, not California law. Therefore, employers need to evaluate which law governs their situation (generally the law that provide more benefits or protections to the employee will apply, but this can be a complicated analysis, so approach with caution). I’ll write more about how these changes will effect California employers in the coming days, as well as publish some resources for California employers to help navigate these changes.