Client Alert: Department of Labor Updates Salary Level Test of Overtime Regulations
- Review all employee classifications, not just those earning below the new required salary level. If the duties test is not met, then reclassify the employee as non-exempt.
- Evaluate possible alternatives of how to meet this new salary level requirement.
On May 17, 2016, the U.S. Department of Labor issued final rules significantly increasing the salary requirements for exempt status that take effect near the end of this year. The new salary requirement will make many employees eligible for overtime and requires every organization to review its critical determination of who is exempt and who is not.
Wage Hour Division Final Rule
Beginning December 1, 2016 employees who are to be treated as exempt from overtime and minimum wage requirements must receive a weekly salary of at least $931 (which equates to $47,476 annually for a full time employee). For the "highly compensated employee" exemption the annual salary is set at $134,004.
Non-discretionary bonuses, incentives and commissions can be counted for the weekly salary test, but only up to 10% of the salary. To be counted, the non-discretionary bonus or incentive compensation must be paid on a quarterly or more frequent basis. Employers can make "true up" payments so long as those true-up payments are made no later than the next pay period after the end of the quarter. If the "highly compensated employee" exemption applies to the employee, then the true up can be made on an annual basis.
Automatic Adjustments to Salary Level will be made every three years, with the first adjustment effective January 1, 2020. The salary thresholds will be maintained at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). For the "highly compensated employee" salary level the threshold will be maintained at the 90th percentile of annual compensation for full-time salaried workers nationally. The Department of Labor will publish updates to the salary levels at least 150 days before their effective date.
Summary of the Exemptions
To be exempt from overtime and minimum wage rules the following three tests must be met:
- The "salary basis test" which requires that the employee be paid a predetermined and fixed salary that is not subject to deductions because of variations in the quality of the work or quantity of work performed (such as hours); with limited exceptions for full days of absence and the first and last weeks of employment. The Final Rule makes no changes to the salary basis test.
- The "salary level test" which requires that the amount of the salary paid must meet a certain minimum. The Final Rule changes this test as described above.
- The "duties" test which requires that the employee's job duties primarily involved executive, administrative, or professional duties as defined in DOL regulations (last updated in 2004). The Final Rule makes no changes to the duties tests.
- Being paid a salary is not sufficient to establish exempt status – the duties test must also be met.
- Being an officer does not automatically satisfy the duties test (titles are irrelevant to the duties test).
- The "highly compensated employee" exemption does not exist under Illinois' Minimum Wage Law.
We Can Help You
Please contact any of the key contacts listed below or another member of the Firm, if you have any questions or would like additional information concerning these issues.
Compensation & Employment Group Key Contacts
Barack Ferrazzano Compensation & Employment Group
Barack Ferrazzano’s Compensation & Employment Group advises clients in every aspect of executive compensation, employee benefits, and employment and labor matters, all within the complex statutory and regulatory framework in which these plans and arrangements exist. We seek to find the most cost- and time-efficient solutions for our clients business needs, whether in plan design, implementation and administration, or dispute resolution.