New Federal Overtime Rules Mean Changes to Classification of Exempt Workers in All States


All Employers


December 1, 2016


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The U.S. Department of Labor (“DOL”) recently released the long-awaited Final Rule (“Rule”) changing overtime exemption requirements under the Fair Labor Standards Act (“FLSA”) affecting all states.  Employers need to review employee classifications for possible changes in preparation of the December 1, 2016 deadline.


Key Provisions of the Final Rule

Significant highlights from the Rule for overtime exemptions include:

  • The minimum salary for white collar employees (i.e., executive, administrative, professional, outside sales, computer employee, and highly compensated employees as defined by the DOL) has been nearly doubled from $455/week to $913/week (annualized at $47,476/year). This figure represents the 40th percentile of earnings of full-time, salaried workers in the lowest Wage Census region (currently, the South).
  • The minimum salary for the “highly compensated employee” exemption (employees who qualify through a shortened executive, administrative, or professional duties test, but are also highly paid) has been raised to $134,000/year (up from $100,000). This figure represents the 90th percentile of earnings of full-time, salaried workers nationally. Note that this exemption is not recognized in all states (e.g., California).
  • Beginning January 1, 2020, the minimum salary threshold will be automatically updated every 3 years, and tied to the 40th and 90th percentiles referenced above. The DOL will announce changes 150 days in advance.
  • Employers can satisfy up to 10% of the new salary thresholds through: (A) nondiscretionary bonuses, or (B) other incentive payments, such as commissions, paid at least quarterly. Note that some states (e.g., California) currently have no equivalent to this allowance, and it is currently unclear if states will adopt this new federal allowance.

Note that the federal “duties test,” used to identify exempt employees based on an employee’s primary duty, has not changed.


How the Rule Impacts Employers

The new federal Rule is now the strictest in the nation.  California is expected to have the most workers affected by the new Rule, followed by Texas and Florida.  (Review White House chart HERE to see where your state ranks.)  Although employers will need to comply with the new federal Rule by December 1, 2016, employers will also still need to comply with their state’s overtime exemption rules.  In the simplest terms, employers are faced with:

  • Raising employee salaries above the federal threshold in order to preserve their exempt status.
  • Reclassifying employees that will be affected to non-exempt and limit their hours to 40 per week.

There are more sophisticated strategies to contain costs that depend on respective state requirements and each employer’s workforce profile that can be designed.



Action Items:

  1. Contact ManagEase at (888) 230-3231 to engage our services for:
    • Evaluating and developing a transition strategy for compliance with the new Rule
    • A job description and compensation audit
    • Implementation of an alternative work week to minimize overtime exposure
    • Training for supervisors, managers, and/or staff on the new rules
    • Strategies to discreetly transition employees from exempt to non-exempt
    • A compensation audit for compliance with the California Fair Pay Act and/or federal Equal Pay Act
  2. Read the full text of the Final Rule on the Federal Register here, or visit the DOL’s website for additional resources here.

Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser.

© 2016 ManagEase, Incorporated.

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