Increase to $47,766 for FLSA "Exempt" Annual Salary Threshold Effective December 1, 2016

The U.S. Department of Labor announced on May 18 that the final rule for changes to the “white collar” exemptions under the Fair Labor Standards Act (“FLSA”) include a raise in the annual minimum salary threshold level to $47,476.00 ($913.00 per week).  The final rule also raises the compensation requirement for the highly compensated employee exemption to $134,004.00 annually. No changes to the “duties” tests for any of the recognized exemptions have been made. The new rule is effective December 1, 2016. 

The final rule also contains an automatic escalator for the minimum annual salary threshold requirement that will be effective every three years beginning January 1, 2020. Specifically, the minimum salary level will be updated to maintain a threshold equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently, the South).  The threshold salary is expected to rise to $51,000.00 by 2020 when the first automatic increase becomes effective. Similarly, the highly compensated employee minimum salary also will be automatically updated equal to the 90th percentile of annual earnings of full-time salaried workers nationally.

For the first time, employers will be allowed to include non-discretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the minimum salary level. However, employers must ensure that such bonuses and incentive payments are paid on at least a quarterly basis.  

Employers are reminded that FLSA coverage for all employees who work for the employer (“enterprise” coverage) exists where the entity has annual revenues of at least $500,000 unless an exemption from coverage applies. Non-profits often are excluded from FLSA coverage based on engagement in a charitable (versus commercial) activity. In determining whether a non-profit organization is a covered enterprise, only activities performed for a business purpose are considered.  In addition, income that a non-profit uses in furtherance of charitable activities is not factored into the $500,000 threshold. However, some non-profits engaged in charitable activities may also manage revenue-producing activities resulting in coverage under FLSA if the activity produces revenue of at least $500,000 annually.

Employers should immediately begin evaluating the impact of the new rule, beginning with a thorough internal wage classification audit. This information will enable employers to more appropriately respond to the increased salary level by (a) raising salaries to maintain exempt status, (b) reclassifying employees as salaried or hourly non-exempt and paying these employees overtime for more than 40 hours work per week; or (c) reorganizing workloads, adjusting schedules or spreading work hours to minimize the possibility of overtime.