Department of Labor Finalizes White Collar Overtime Rule

Legislation | May 17, 2016 | by Jennifer Hilliard

The Department of Labor (DOL) today released its final so-called white collar overtime rule, which will take effect on December 1, 2016. As a result of the final rule, the Obama administration estimates that 4.2 million salaried employees who presently qualify for the “white collar” exemption (Executive, Administrative, Professional, Outside Sales and Computer Employees) from the Fair Labor Standards Act (FLSA) will soon be eligible for overtime protection or, in the alternative, more time off should employers elect to limit their hours to restrict overtime pay.

Key provisions of the final rule include:

  • Salary Threshold - The salary threshold for an employee to qualify for the white collar exemption will increase from $455 per week to $913 per week ($47,476 for a full-year worker). This increase is designed to equal the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region, currently the South.  DOL calculates that 35 percent of full-time salaried workers will be automatically entitled to overtime, based solely on their salary. In its comments, LeadingAge asked the DOL to limit the increase in the salary threshold to $35,000 in 2016 dollars and couple that increase with an extended enforcement deadline to afford employers sufficient time to train any formerly exempt employees regarding proper work practices for non-exempt employees.
  • Automatic Updates to Salary Threshold – The final rule provides for automatic increases to the salary threshold every three (3) years, beginning Jan. 1, 2020. Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the lowest-wage Census region, estimated to be $51,168 in 2020. The DOL will post new salary levels 150 days in advance of their effective date, beginning August 1, 2019. LeadingAge, in its comments to the proposed rule, argued against such automatic updates on the basis that automatic updates remove the issue of the proper balance between employer and employee interests from public discourse and bypass the DOL’s accountability to the public on such issues. 
  • Duties Test - The final rule does not make any changes to the “duties test” that determines whether white collar salaried workers earning more than the salary threshold are ineligible for overtime pay.  For workers whose salary exceeds the salary threshold, employers will continue to use the same duties test to determine whether or not the worker is entitled to overtime pay. LeadingAge is pleased that the DOL elected not to make any changes to the duties test, which could have further eroded the white collar exemption.
  • Highly Compensated Employees (HCE) - The final rule also updates the total annual compensation level above which most white collar workers will be ineligible for overtime. The final rule raises this level to the 90th percentile of full-time salaried workers nationally, or from the current $100,000 to $134,004 per year.  Like the general salary threshold, the HCE salary threshold will increase every three (3) years to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020. 
  • Bonuses, Incentive Payments and Commissions - The final rule will allow up to 10 percent of the salary threshold for non-HCE employees to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis. 

There is no doubt the final rule will have a profound effect on LeadingAge members. LeadingAge, in its comments, agreed with DOL that the salary threshold is outdated and should be updated, particularly as adequate compensation is critical for our members’ workforce—a workforce that is called to serve the frailest among us. Yet without corresponding increases in Federal and State funding for the services LeadingAge members provide, many will be hard pressed either to raise salaries to meet the new thresholds or absorb the additional overtime costs, which is why LeadingAge advocated for a more modest increase in the salary threshold.

The sudden, marked increase occasioned by the final rule likely will force many members either to place strict limits on their employees’ ability to earn overtime pay or adjust down their base rate with the expectation that they will work a certain amount of overtime to net the same salary they were making previously. Neither of these options produces a net benefit to the employee in terms of increased wages, and the latter option could result in a net decrease in pay if the employee does not work the anticipated overtime hours. The burden of compensating for limited hours would fall squarely on employees who remain qualified for the white collar exemption, thereby frustrating one of the stated purposes of the rule to prevent overwork.

In connection with the final rule, the DOL has published information for non-profits indicating that some purely charitable non-profits may not be subject to the FLSA and hence the final white collar rule. Also, the information states that if an employee of a non-profit does not engage in interstate commerce, the individual would not qualify for FLSA coverage. In each instance however, the qualification threshold for FLSA coverage is so low that the application of these exemptions would be rare.

Nevertheless, LeadingAge urges members to consult with their employment counsel to determine exactly how the final rule will affect them and their employees.   

The final rule will be published in the May 23rd edition of the Federal Register. LeadingAge will update this article to include a link to the rule at that time.