Last month the U.S. Department of Labor Wage and Hour Division (US DOL) issued its much anticipated final regulations that substantially increase the minimum salary required to qualify for exemption to the minimum wage and overtime requirements of the Fair Labor Standards Act of 1938 (FLSA). An effort by Republican congressional lawmakers to challenge the rule is unlikely to delay the December 1, 2016 effective date for the new rules. The US DOL claims that 4.2 million workers will become eligible for overtime under the new regulation.

The rules changes, the first in 12 years, will limit the existing FLSA exemption covering white collar workers, including retail managers and administrative workers. Under the updated regulations, beginning on December 1, 2016, most salaried workers earning less than $913 a week—about $47,476 a year—will have to receive overtime pay when they work more than 40 hours a week.  The new threshold salary is a substantial increase from the previous salary cutoff for overtime exempt status, which had been $455 a week or $23,660 annually.  Salaried employees who meet the duties tests set forth in existing FLSA white collar overtime exemptions, but earn less than an annual $47,476 salary, become ineligible to be treated as exempt from overtime rules.

To qualify for exemption under the FLSA, white collar employees generally must meet certain tests regarding their primary job duties and be paid on a guaranteed salary basis at the minimum salary level. Actual job duties, not job titles, determine exempt status. For an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the DOL’s duties regulations. The final rule does not make any changes to these “duties tests” that determine whether white collar salaried workers earning more than the salary threshold are eligible for overtime pay.

Under existing regulations, a more relaxed test makes it easier for workers earning more than $100,000 per year to qualify for the overtime exemption under the so-called “highly-compensated” exemption. However, the updated regulation also increases the total annual compensation threshold required to meet the highly compensated employee exemption from $100,000 to $134,004.  This increase is significantly higher than the threshold proposed for compensated employees in the US DOL’s initial draft issued in the summer of 2015.

In a more positive development for employers, the Labor Department rules have been revised to permit certain non-discretionary bonuses and commissions that are earned quarterly, or more frequently, to be included in the salary-level.  However, this non-guaranteed compensation cannot constitute more than 10% of the total earnings.  This means that employers may pay an employee a fixed salary as low as $821 per week, and at the end of each quarter (or more frequently), pay a lump sum bonus of $1,186.90 (the equivalent of $91.30 a week in non-discretionary bonus over 13 weeks).

Under a more troubling change to the regulations, every three years employers will now be required to review and, if necessary, readjust the salary levels for many exempt workers. This is the result of a provision in the updated regulations establishing a mechanism for automatically updating (and increasing) the minimum salary and compensation levels every three years based on various indices.  According to the US DOL, “[t]he standard 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.”  Future automatic updates to the salary and compensation thresholds will occur every three years, beginning on January 1, 2020.

How to Comply

To ensure compliance with the new regulations, employers should review salary levels and job duties of employees who are currently being characterized as salaried-exempt. It may be necessary to reclassify some employees as overtime-eligible, or adjust salary levels to meet the requirements of the new rules. It is essential for employers to have in place effective time and record keeping policies. Compliance is crucial in light of the US DOL’s aggressive enforcement position and the ever increasing number of overtime lawsuits being filed around the nation by plaintiffs’ class action law firms.

Daniel S. Field is a partner with Morgan, Brown & Joy, LLP in Boston, Mass., representing employers in employment and labor matters.