May 19, 2016

On May 18, 2016, the Department of Labor (DOL) published its long-awaited final regulations updating the Fair Labor Standards Act's (FLSA) overtime requirements. The new rules become effective December 1, 2016.

The major changes, discussed in more detail below, include:

  • An increase in the salary threshold for "white collar" administrative, executive, or professional exemption to $913 per week, or $47,476 annually;
  • An increase in the salary threshold for the "highly compensated" employee exemption to $134,004 annually;
  • A self-adjusting increase to both of these thresholds every three years.

However, the rule will not, as discussed in more detail below:

  • Affect exemptions from overtime for teaching employees or academic administrative professionals employed at educational institutions.

As a reminder, the FLSA is the federal law which (1) guarantees a federal minimum wage, and (2) requires overtime for hours worked above forty hours per workweek at a rate of not less than one and one half times an employee's regular pay. That is, an employee is entitled to overtime unless the employee is "exempt" from the overtime requirement under one of the FLSA's delineated exemptions. The requirements for employee exemptions is the major issue addressed by the new final rule.

"White-Collar" Exemption Salary Threshold.  The FLSA exemption that affects the largest number of American workers is the "white collar" or EAP exemption, which exempts employees whose primary duties are administrative, executive, or professional work and who are also paid on a salary basis (ie, not hourly) above a certain salary threshold. To be exempt, an EAP employee has to meet all three requirements: (1) the primary duty test, (2) the "salary basis" test, and (3) the "salary threshold" test. "Computer"1 employees paid on a salary basis are included in the EAP exemption.

The most dramatic effect of the DOL's new final rule is an increase in the EAP exempt employee's salary threshold. The DOL used the "40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region" of the United States for the new salary level, which is $913 per week, or $47,476 annually for a full-year worker. This is lower than the DOL's estimate in its Notice of Proposed Rulemaking, which was $50,440 annually based on a nationwide figure. After reviewing commentary on the increased costs of its proposed rule, the DOL decided a figure based on the lowest-wage region rather than the whole country would be a more reasonable adjustment. However, the new figure is still more than double the previous threshold of $455/week, or $23,660 annually. The DOL anticipates that approximately 4.2 million more workers will now be eligible for overtime.

Highly Compensated Employees' Salary Threshold.  The DOL followed through on its proposed rule to increase the salary threshold for highly compensated employees (HCE) to "the 90th percentile of full-time salaried workers nationwide," or $134,004 in annual compensation. An employer will be permitted to make an additional payment to an HCE employee in the last pay period of the year (or within one month thereafter) to bump them up to this level. To qualify for this exemption, an employee must also be paid on a salary or fee basis, and meet the same "duty" test of performing one or more of the exempt functions of an administrative, executive, or professional employee.

Scheduled Increases - Every Three Years.  The new rules build in a predictable schedule to increase the salary thresholds in the future. In the past, the salary threshold for EAP and HCE employees has only been raised about every ten years. The DOL has stated the automatic update will "ensure that the salary test level is based on the best available data (and thus remains a meaningful, bright-line test), produce more predictable and incremental changes in the salary required for the EAP exemptions, and therefore provide certainty to employers, and promote government efficiency."

Rather than the proposed annual increase, the DOL settled on an increase every three years on the first of the year. To assist employers, the DOL will publish the updated rates (1) in the Federal Register at least 150 days before they become effective, and (2) on the DOL's Wage and Hour website. Both salary threshold tests will be calculated based on the same data; so, at the first scheduled update in 2020, the DOL will determine the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region for the EAP exemption, and the 90th percentile of wages for full-time salaried workers nationwide for the HCE exemption.

Nondiscretionary Bonuses.  The DOL final rules also contain a provision to count "nondiscretionary bonuses, incentives, and commissions" that are paid quarterly or more frequently towards the salary threshold. In other words, if an EAP employee earns a predictable nondiscretionary bonus or incentive payment, the employer can count that amount as part of their "salary" to determine if they qualify under the "salary threshold" test. The only caveat is that such nondiscretionary bonuses or payment can only count for 10 percent of the "salary threshold" amount.

Also, due to the unpredictability of these payments, if an employee has not been paid an amount equal to 13 times the new exempt weekly wage by the last pay period of the quarter, an employer will be permitted to make one final payment to an employee to raise their compensation to the required threshold "no later than the next pay period after the end of the quarter."2 In other words, an employer can reach the end of the quarter and "bump up" an employee's compensation with a final payment to make sure they reach the salary threshold.

Teaching Employees and Academic Administrative Personnel.  The DOL final rule will have less impact on educational institutions and their employees. Under the new rules, bona fide "teaching" employees with a primary duty of "teaching, tutoring, instructing or lecturing in the activity of imparting knowledge" employed by an educational establishment3 will remain exempt from overtime, regardless of amount of salary.

Additionally, "academic administrative personnel" "[w]hose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment or department or subdivision thereof" and exercise independent judgment will remain exempt if paid at the new salary threshold OR if paid on a salary basis at a rate at least equal to the entrance salary for teachers in the educational establishment. These employees perform work related to the academic functions of the school, rather than general business operations, and include superintendents, principals, and academic counselors. Employees who likely will need to meet the new salary threshold to remain exempt include Registered Nurses working in schools if not otherwise engaged in teaching as a primary duty, or otherwise qualifying non-academic administrative personnel.

If you have employees who you have treated as exempt but do not meet the new salary level, now is the time to plan for how you will comply with the new rules. Employers may want to audit their employees to determine who is affected and make determinations on how to comply, which may include one or more of the following: increasing the employees' salary to satisfy the threshold, re-classifying employees to non-exempt, planning for payment of overtime, or limiting employees' working hours to 40 or fewer per work week.  If you would like assistance working through these issues, please feel free to contact Ahlers & Cooney, P.C. for more information.  

This Client Alert is intended to give an overview of the most significant changes to the law with the DOL's final rule, and is not exhaustive of all FLSA and overtime-related issues. To find the DOL's commentary, summary, and the language of the final rule, follow this link.

Ahlers & Cooney Labor and Employment Practice Group

1 "Computer employees" are employed as a "computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field" performing specified primary duties. 29 C.F.R. § 541.400. This does not include employees "engaged in the manufacture or repair of hardware or related equipment."' 29 C.F.R. § 541.401. Employees who qualify as "computer employees" and are paid a specified hourly wage are not affected by the final rule.

2 By way of further explanation, the 13 week wage calculation is reached because the nondiscretionary bonus or commission amount counted toward the threshold needs to be paid at least quarterly, or at least every 13 weeks. Thus, if an employee is not at the threshold by the end of the quarter (13 weeks), they can receive a "catch up" payment.

3 The term "educational establishment" includes an "elementary or secondary school system, an institution of higher education or other educational institution." 29 C.F.R. § 541.204(b).

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