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New FLSA Exemption Rules: Should You Take Advantage of the New Commission Provision?

After years of anticipation, the U.S Department of Labor (DOL) has finally released the revised regulations affecting certain kinds of employees who may be treated as exempt from the federal Fair Labor Standards Act’s (FLSA) overtime and minimum-wage requirements. If you currently consider any of your employees to be exempt “white collar” employees, you might have to make some sweeping changes.

In brief, the following changes will be made in DOL’s definitions of executive, administrative, professional, computer-employee, and highly compensated exemptions under the FLSA’s Section 13(a)(1):

  • The minimum salary threshold is increasing to $913 per week, which annualizes to $47,476 (up from $455 per week, or $23,660 per year).
  • This amount will now be “updated” every three years (meaning that it will likely increase with each “update”), beginning on January 1, 2020. The DOL will announce these changes 150 days in advance.
  • Employers will be able to satisfy up to 10 percent of this new threshold through nondiscretionary bonuses and other incentive payments, including commissions, provided that the payments are made at least quarterly. This crediting will not be permitted as to the salaries paid to employees treated as exempt “highly compensated” ones. We discuss this in more detail below.
  • The total-annual-compensation threshold for the “highly compensated employee” exemption will increase from $100,000 to $134,004 (which will also be “updated” every three years).

These rules will become effective on December 1, 2016, which is considerably later than had been thought. While one or more challenges to the revision may be successful, the prospects of a wholesale clawback before that date is unlikely. Employers should act now.

The Significance of What Has Changed

Essentially, the DOL is doubling the current salary threshold. While this is the change requiring immediate attention, perhaps the more significant change in the long term is the anticipated adjustments in this regard going forward. For the first time, the DOL will publish what amounts to an automatic “update” to the minimum salary threshold for these exemptions.

Another “change” that the DOL has made much of is the “crediting” of some nondiscretionary bonuses and other incentive payments to satisfy up to 10 percent of the new salary threshold amount. While this might be a useful option in some situations, employers must remember that it is not an alternative to meeting the $913 threshold. At least $821.70 per week must be met every pay period and the employer still must ensure that the remaining $91.30 per week is met for each quarter. In other words, the employer is simply paying the 10 percent from another bucket. Moreover, should an employee’s qualifying incentive pay fall short, the employer must go back and pay overtime for that quarter, which requires accurate hours worked records.

Many employers have been excited about this new provision. However, an employer looking to meet the new salary threshold without increasing an employee’s pay overall would likely be better served by reducing the incentive pay going forward (for example, paying a lower commission percentage) to internally offset the increased salary payment. If an employer instead wants to rely on commissions or other incentive pay to meet the salary-basis amount, it might consider whether a traditional “draw” plan, under which the $913 per week threshold is met each pay period, would meet its needs. Employers should consult with legal counsel to determine which of these options fits best for its particular circumstances, including whether such a pay structure is both (1) designed in compliance with state law requirements and (2) not outweighed by the administrative burden of implementing and monitoring the same. In sum, while taking advantage of the 10 percent commission provision seems enticing, many employers find that the actual mechanics of such a program may be more burdensome than initially imagined.

What Has Not Changed

The DOL had asked for comments directed to whether there should be a strict more-than-50- percent requirement for exempt work. The agency apparently decided that this was not necessary in light of the fact that “the number of workers for whom employers must apply the duties test is reduced” by virtue of the salary increase alone. Accordingly, the DOL did not change any of these exemptions’ requirements as they relate to the kinds or amounts of work necessary to sustain exempt status (commonly known as the “duties test”).

There are several other exemptions that have not changed, including the outside-salesperson exemption (from minimum wage and overtime) and the exemptions from overtime only. For example, the widely relied-upon exemptions commonly referred to as the 7(i) commissioned retail-employee exemption, the 13(b)(10) exemption applicable to certain dealership employees, and the 13(b)(1) exemption for certain motor carrier employees, all remain intact. Although these exemptions have not changed, please keep in mind that they are from overtime only (minimum wage and timekeeping requirements still apply) and each has its own nuances.

What Should You Do Now?

Right now, you should be:

  • analyzing whether the requirements for the “white collar” exemptions you have been relying upon are met;
  • evaluating what might be changed about one or more jobs so that the incumbents may be treated as exempt in the future;
  • even if the incumbents meet the duties requirements of an exemption, considering whether a salary increase will be necessary and, if so, whether that approach would be undesirable in the long run as the FLSA’s salary threshold continues to increase;
  • considering the possible application of alternative FLSA exemptions; and
  • developing FLSA-compliant pay plans for employees who have been treated as exempt but who no longer will be.

In particular, employers should conduct this analysis now so that it has time to announce, and possibly even implement, its changes in advance of December 1. For example, some states require a specific amount of advance notice before changing pay terms. Moreover, for many employees Thursday, December 1, will fall in the middle of a workweek and pay period. Accordingly, some consideration should be given to making the change itself well in advance of December 1 to eliminate the burden of running payroll for an employee being paid at two different rates or with two different pay structures. At the same time, making the changes in November might require an employer to evaluate how this will affect an employee’s schedule or pay for the Thanksgiving timeframe. How these and similar factors affecting the transition should be addressed will vary by employer, and likely even by position and state.

Content included in the Summer 2016 Benefits and Employment Briefing provided by our partner, United Benefit Advisors