FLSA Overtime Rule to Take Effect December 1, Salary Minimum Will Be $47,476
Author: Michael Cardman, XpertHR Legal Editor
May 18, 2016
The minimum salary for many overtime-exempt employees will roughly double from $23,660 to $47,476 under new Fair Labor Standards Act (FLSA) regulations that will take effect December 1.
That gives employers almost 200 days -- far more than the 60 or 120 days most observers had been expecting -- to prepare.
Noteworthy changes from the draft regulations that were proposed by the US Department of Labor (DOL) last summer include:
- Salary threshold: The minimum salary level for most overtime-exempt employees will be set at the 40th percentile of full-time salaried workers in the lowest-wage Census region (rather than the 40th percentile of full-time salaried workers nationwide), resulting in an initial minimum salary level of $47,476 rather than the $50,440 that was previously estimated;
- Tri-annual adjustments: The minimum salary level will be automatically adjusted every three years (rather than annually, as originally proposed) based on the 40th percentile level (rather than the Consumer Price Index, as the DOL had been considering); and
- Incentive pay: Up to 10% of the salary minimum can come from nondiscretionary bonuses, incentive payments, and commissions, paid at least quarterly (rather than at least monthly, as the DOL had first proposed), with a provision allowing an employer to make a "catch-up" payment each quarter if an employee's average weekly salary falls below the minimum.
Paul DeCamp, a principal in the Washington, D.C., office of Jackson Lewis P.C., and a former administrator of the DOL's Wage and Hour Division, said the changes from the proposed regulations are "a fig leaf at best" and will do little to assuage employers' concerns.
Even though the minimum salary level will now be based on the Census region with the lowest average income (currently the South), state-by-state differences in income mean that the FLSA's overtime exemptions will effectively be ruled out for otherwise-exempt workers in the states with the lowest average wages. "Supervisors in a factory who don't do a lick of physical labor and make $40,000, $45,000 per year will not be exempt," he told XpertHR. "The regulation will make the exemptions unduly narrow, contrary to what Congress intended."
Adjusting the minimum salary level every three years based on the 40th percentile level will exacerbate this problem, he predicted. Raising the minimum salary will cause employers to reclassify more employees as hourly nonexempt workers rather than salaried exempt workers. This in turn will reduce the pool of full-time salaried workers on which the 40th percentile is based, resulting in a spiraling effect by which the 40th percentile floor rises far more quickly than the rate of inflation.
The automatic adjustments also may violate the Administrative Procedure Act, the law that governs how the DOL and other federal agencies can promulgate regulations, according to DeCamp. There is a "strong legal argument," he said, that the DOL needs to go through the full notice-and-comment rulemaking process every time it wants to raise the minimum salary level: "They can't just do it once, set it and forget it."
Federal courts might overturn the regulations based on some of these issues. And if presumptive Republican nominee Donald Trump is elected president, his administration might issue new FLSA regulations that would, pardon the pun, trump the current regulations.
"But as a practical reality, the safe assumption and the better assumption is that these regulations are going to be binding and employers need to be ready December 1 with pay practices that satisfy them," DeCamp said.
The DOL estimates that about 4.2 million workers will become newly eligible for overtime as a result of the new salary minimum. As the DOL noted, the only options for employers of these workers is to:
- Increase their salary to $47,476 or higher to retain their exempt status;
- Pay them overtime for any overtime hours worked;
- Reduce or eliminate overtime hours;
- Reduce the amount of pay allocated to base salary (provided they still earn at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
- Use some combination of the above.