June 15, 2016 –The U.S. Department of Labor (DOL) in May published a final rule that makes certain changes, effective Dec. 1, 2016, to the “white collar” exemptions in the Fair Labor Standards Act (FLSA). Most significantly, for just the eighth time since enactment of the FLSA in 1938, the DOL has adjusted minimum salary levels needed to meet the exemptions for salaried executives, administrative employees, and professionals. 

Current Law

The FLSA requires that employers pay overtime (at time and one-half the regular rate of pay) for hours worked in excess of 40 hours in a work week. Currently, the white collar exemptions apply to employees who are: 1) paid on a salary or fee basis; 2) paid a salary of at least $455 per week ($23,660 per year); and 3) meet a “duties test” for exempt salaried executives, administrative employees, or professionals.

The FLSA also exempts certain highly compensated employees who do not meet the more stringent test above. Under current law, to be exempt as a Highly Compensated Employee (HCE), an employee must receive annual compensation of $100,000 which must include the $23,660 in guaranteed salary. 

Additionally, the employee must customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee. 

The Basic Changes

The changes to the FLSA's rule (29 C.F.R. part 541) are as follows:

• The salary minimum needed to meet the exemption will increase to $913 per week or $47,476 per year;

• Up to 10 percent of the salary minimum may come from nondiscretionary bonuses and incentive payments, including commissions ($91.30 per week), as long as such payments are made at least quarterly;

• The minimum annual compensation for exempt HCE employees will be increased to $134,004; 

• Annual salary minimums will be adjusted every three years, beginning in January 2020.

The salary minimum was set at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently, the South). The HCE salary minimum was set at the 90th percentile of weekly earnings of full-time salaried workers nationwide.

The Duties Test

It is important to note that although the July 2015 proposal to modify the rule sought comment on potential changes to the duties test, no changes were adopted.

State Requirements Affect the Analysis

Additionally, and perhaps more importantly, practitioners and employers must keep in mind that states may have more stringent exemption tests in place.

In Wisconsin, for example, the duties tests contain percentage limits on nonexempt work (20 percent for most occupations; 40 percent in retail and service establishments) similar to the pre-2004 federal “long test” that – for most employers – make the federal duties test irrelevant. 

Likewise, Wisconsin's salary minimums have not been updated for many years and are irrelevant to employers subject to both federal and state law ($700 per month for executives and administrative employees; $750 per month for professionals). 

Essentially, employers subject to both Wisconsin law and the FLSA must look to the state duties test and the federal salary minimum to comply. 

Some employers, though, are not subject to Wisconsin's requirements and need to look to federal law only. This includes most employees of nonprofit organizations. 

Another nuance: Both the FLSA and Wisconsin's overtime law apply to employees of the state and its political subdivisions. However, when analyzing exemptions for these employees, employers must look solely to federal law since the Wis. Admin. Code § DWD 274.08 (2) provides that the state exemptions are not applicable to such employees.

Moreover, Wisconsin law does not contain the HCE exemption, so its use is not available to Wisconsin employers subject to both laws.

Conclusion: What Should Employers and Practitioners Do?

Attorneys and their employer clients should take proactive steps to ensure compliance.  This should begin with an analysis of the current salaried exempt workforce earning between $23,660 and $47,476 annually.

DOL concluded that approximately 4.2 million workers nationwide fit into this category. This would equate to about 70,000 workers in Wisconsin. Consider these options:

• The employer could simply convert such workers to non-exempt status and begin paying overtime. Since the exemption would no longer apply, the employer would need to begin tracking hours worked;

• The employer could increase the salary to $913 per week to continue to apply the exemption;

• The employer could reorganize workloads and adjust schedules to spread work hours so as to avoid additional overtime liability;

• If the employee does not work more than 40 hours per week, no change is necessary (other than keeping time records); and

• The employer could adjust wages to reallocate the amount paid for regular wages and the amount paid for overtime to keep wages relatively constant.