Hunton Employment & Labor Perspectives

Today, the U.S. Department of Labor published its final rule increasing the salary requirement for the Fair Labor Standards Act’s white-collar exemptions to $47,476 per year ($913 per week). Though the new salary level is not as high as the $50,440 per year level predicted by the DOL in its July 2015 proposed rule, the final rule nonetheless more than doubles the current salary requirement of $23,660 per year ($455 per week). The reason the salary requirement is somewhat lower than initially predicted is that the final rule applies the proposed 40% threshold to the average full-time salary compensation paid in the lowest-wage Census region, as opposed to applying the 40% threshold to the national salary average.

The final rule also provides for an automatic updating (or “indexing”) of the salary requirement so that the DOL does not have to engage in future rulemakings in order to increase the salary requirement. The indexing process will occur every three years and will require a reapplication of the 40% threshold against the full-time salary average in the lowest-wage Census region. The problem with using the 40% threshold to index the salary level is that the salary level will increase at a far greater rate than inflation. As employers begin to reclassify from salary to hourly those employees making less than the new $47,476 salary requirement, the average salary against which the 40% applies will necessarily increase because the salaries that are currently below the 40% threshold will no longer be there to hold the average salary figure down. Stated differently, if there are fewer individuals being paid a salary that is below $47,476, then $47,476 will no longer represent the 40th percentile of average salaries. Applying the 40% threshold to an exponentially increasing salary average will result in a similarly increasing salary level requirement.

Perhaps the only silver lining for employers is that the final rule did not make any changes to the duties test for the exemptions, as many had predicted it would.

The new salary requirement will take effect on December 1, 2016, as opposed to the early summer effective date most in the employer community were anticipating. Nonetheless, employers should not be lulled into inaction simply because the new rule will not be effective for another 190-plus days. Instead, employers should begin planning immediately. Adjusting to the new rule will be a much more complicated and time-consuming process than may appear on the surface. Four months is not a lot of time for an employer to adequately consider the myriad issues involved in complying with the new rule. Even after the all-important decision of whether to reclassify or increase salaries has been made, pay and timekeeping systems and practices must be modified. That all takes time, and there is not a lot of it.

In the coming days, we will provide a more in-depth analysis of the final rule and what employers should be doing to prepare for the December 1, 2016 effective date. So, please stay tuned to the blog.