In 2015, the Department of Labor (“DOL”) proposed substantial changes to the minimum salary level requirements, sought input on whether bonuses and incentives should be included in meeting the salary level test and considered changing the duties test to establish overtime eligibility. Taken together, these proposed changes would have had a drastic effect on the obligation of employers to pay overtime. On May 18, 2016, DOL issued its Final Rules and employers have until December 1, 2016 to comply. Overall, the changes strike a middle ground as DOL declined to adopt the more restrictive California 50% duties test. However, doubling the salary level threshold and other changes present significant economic and compliance challenges for employers. Below is a summary of key takeaways and steps employers should consider to address these changes and ensure compliance.

Exempt employees must earn a salary level of at least $47,476 ($913/week): With the new regulations, the requirement that exempt employees must be paid a salary remains the same, but the minimum salary threshold will almost double to $47,476 per year. This final number is less than the $50,444 in the proposal but still marks a substantial increase in salary requirements for exempt employees. To ensure compliance, employers will need to look at all of their employees currently classified as exempt who are earning less than $47,476 and assess (i) whether they remain comfortable that the duties performed satisfy the exemption requirements; and (ii) if the duties test is satisfied, whether they want to increase the salary level or whether it would be more cost effective to pay overtime to the employees. As, at least, 4 million employees enter the overtime eligible category, employers will have to pay special attention to employees who telework or who have flexible schedules. Training employees and managers to ensure that overtime eligible employees do not work more than 40 hours per week will be paramount as the potential liability increases.

Salary level indexed every three years: DOL’s proposal included a provision that the salary level would be automatically indexed on an annual basis. The final regulation calls for updating the salary level every three years. While this represents some reprieve for employers, it leads to compliance challenges as employers will need to continue to monitor whether exempt employees continue to meet the duties and revised salary test at the time of the index change… As we noted previously, the salary indexing remains subject to a legal challenge as it is unclear whether the Fair Labor Standards Act gives DOL the authority to index.

Inclusion of nondiscretionary bonuses and incentives: For the first time, the DOL will allow employers to satisfy the salary level test with non-discretionary bonuses, commissions or other incentives as long as they are paid quarterly and do not exceed 10% of the $47,476 salary level. The regulations also give employers the opportunity to provide a “make up” payment if due to poor sales in the quarter, for example, the anticipated commissions render the employee’s quarterly salary below the new salary threshold.  Paying and accounting for bonuses and incentives on a quarterly basis represent a new way of operating for many employers who are used to performing this function on an annual bases. Managers will need to be mindful of whether production bonuses or other incentives are sufficient for employees to reach the salary threshold but also not large enough to surpass the 10% limit. This is another area for training of managers and compensation professionals.

Highly Compensated Employees: The separate exemption for “highly compensated employees” where the employee need only perform one of the exempt duties or responsibilities to satisfy the exemption, will now apply to employees whose annual salary is more than $134,004. This is $34,000 more than the current level and $12,000 more than proposed. As this is a significant increase, fewer employees will qualify for the reduced duties test.

Duties Test Remains the Same:exempt It was widely believed that DOL was leaning towards changing the test that an employer would need to satisfy to demonstrate that an employee qualified for the executive, administrative or professional exemption from overtime. Based upon language in the proposed regulations, DOL strongly signaled that it would change the duties test and look to adopt the more restrictive test in California where employees would have to spend at least 50 percent of their time performing exempt duties to qualify for the exemption. However, in the final regulations, the DOL adhered to the existing test and the critical question remains whether an employee’s primary duty satisfies the administrative, professional or executive definitions.

The bottom line is that the Final Rules will have a major financial and operational impact on for-profit, non-profit and governmental employers. The increase in the salary threshold, plus the increase in the salary level for the highly compensated exemption, means that millions of workers will now be eligible for overtime who were not previously eligible. Employers will need to make tough decisions about whether to reclassify workers, increase compensation levels and/or re-structure positions to comply with the new rules. Employers who continue to treat employees as exempt under one of the white collar exemptions will also need to audit their workplaces to ensure that exempt employees meet the new salary level test, be prepared for the amounts to index, and train human resources and managers on how to calculate and track bonus and incentive payments. Employers with non-exempt employees, especially those who telework or work flexible schedules, will need to closely monitor hours and reporting to make sure these workers do not inadvertently trigger overtime liability. In addition, employers should revisit the “off-duty” provisions of their device use policies to ensure that employees are not working unauthorized hours.