May 23, 2016
Compliance Matters


On May 18, 2016, the U.S. Department of Labor (DOL) issued its long awaited regulations which more than double the minimum salary requirement for employees to be deemed "exempt" from federal overtime requirements under the law known as the Fair Labor Standards Act (FLSA).  According to statistics released by the DOL, the new regulations will require employers to pay overtime to more than 4 million additional employees unless their salary is increased to the new minimum threshold.  This FAQ explains the key provisions of the new regulations.

Q. What is the new salary requirement for employees to be exempt under the FLSA?
A. The new regulations increase the annual salary requirement for exempt status from $23,660 ($455/week) to $47,476 ($913/week) .

Q. When do the new regulations go into effect? 
A. December 1, 2016. This gives employers a little more than six months to comply.

Q. How do the new regulations affect the overtime rules? 
A. For employees to be overtime exempt, employers must satisfy both federal and state overtime requirements. For California employers, the minimum salary for exempt status is pegged at twice the state minimum wage. Currently, this equates to an annual salary of $41,600 ($800/week). Because the new federal salary standard is even higher, California employers must pay the higher salary of $47,476 to continue treating employees as exempt after December 1, 2016. The California minimum wage is scheduled to increase each year until it reaches $15 per hour in 2022, which equates to an annual salary of $62,400 ($1,200/week). By 2019, the California minimum salary threshold for the overtime exemption will be higher than the federal standard, when the CA minimum wage goes to $12/hour, and the annual salary for exempt employees increases to $49,920 ($960/week).

Q. Can any portion of the new salary requirement be comprised of incentive compensation? 
A. Yes.  The new federal regulations permit up to 10% or $4,747.60/year ($91.30/week) be comprised of non-discretionary bonuses and commissions. This means the base annual salary must be at least $42,728.40 ($821.70/week), and the balance can be derived from incentive compensation.  The regulations also permit employers to make up any "short fall" each quarter if the incentive compensation is not sufficient to satisfy the new salary threshold.  However, California employers cannot take advantage of this wrinkle in the law because CA law does not currently permit employers to apply incentive compensation to meet the state salary standard. Accordingly, California employers must still pay a base salary equal to twice the minimum wage, which limits the amount of incentive compensation that can be applied as the state minimum wage increases. For example, when the California minimum wage increases to $10.50 on January 1, 2017, the minimum annual salary for the state overtime exemption will be $43,680. To satisfy both the California and federal salary standard, California employers can only apply $3,796/year in incentive compensation. This amount will continue to decrease each year as the state minimum wage increases.

Q. Do the new regulations change the rules for so-called "highly compensated employees" (HCE)? 
A. Yes. The current FLSA regulations relax the "duties test" for any salaried employees deemed a "highly compensated employee", meaning that they are paid a minimum salary of $100,000/year. The new regulations increase the minimum annual salary for HCE's to $134,004, but permit anything over a base salary of at least $47,476/year to be paid as incentive compensation. Notably, California does NOT have an equivalent exemption for HCE's, so CA employers cannot take advantage of this portion of the regulation.

Q. Will the federal salary requirement be increased again? 
A. Yes. The federal salary will be adjusted every three years for inflation, beginning January 1, 2020.

Q. Do the regulations change the "duties test" for exempt status? 
A. No.  Although the DOL was considering changing the duties test to make it more difficult to establish the exemption, the final regulations do not change this part of the exemption. Generally, under the FLSA, employees that meet the salary requirement must also satisfy the duties test for the executive, administrative or professional exemption. This means their "primary" or most important duties must be exempt. The new regulations do not change this requirement. Note however that CA has a stricter "time based" requirement that employees MUST regularly spend more than 50% of their work hours performing exempt duties. This can be a very difficult requirement to satisfy.  While it is possible that employees who are at or close to the minimum salary requirement also satisfy the duties test, this is frequently a very close question.

Q. What should employers do to prepare for the new regulations? 
A. Employers must carefully review their current practices and ensure employees who are classified as exempt satisfy both the salary and duties requirements for exempt status. Employees that are paid a salary that is less than the new requirement (assuming the duties test is met) must either receive a salary increase or be re-classified as non-exempt.  If employees are re-classified to hourly non-exempt, the hourly rate can be adjusted so that the employee's total compensation with overtime is comparable to their existing salary.

If you have any questions, please call your firm contact at (818) 508-3700 or visit us online at .
Richard Rosenberg

Jeffrey Fuchsman

Ballard Rosenberg Golper & Savitt, LLP

500 N. Brand Blvd.
Twentieth Floor
Glendale, CA 91203
(818) 508-3700

57 West 38th St.
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New York, NY 10018
Ken Ballard: 
(212) 857-0244

6135 Park Drive South
Suite 510
Charlotte, NC 28210
Matthew Wakefield:
(704) 846-2143 


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