In a highly anticipated move, the U.S. Department of Labor (“DOL”) issued its Final Rule today modifying the salary basis test for the Fair Labor Standards Act’s (“FLSA”) executive, administrative and professional exemptions.

The DOL more than doubled the salary level required for employers to satisfy the salary basis test from $23,660 per year to $47,476 per year, or from $455 to $913 per week.  The DOL also increased the salary threshold for the FLSA’s “highly compensated employee” exemption from $100,000 per year to $134,004 per year.  Minnesota employers should remember that the Minnesota Fair Labor Standards Act does not recognize the “highly compensated employee” exemption.  Thus, Minnesota employers cannot rely on that exemption regardless of the salary threshold.

Despite the significant increase in the salary basis threshold, employers can breathe a qualified sigh of relief.  Earlier analyses had suggested the DOL might set the minimum salary threshold even higher, in excess of $50,000 per year.  Further, employers had feared the DOL would adopt the so-called “quantitative” duties test.  Currently the test under California law, the “quantitative” test would have required employers to show that exempt employees spend at least 50% of their work time engaged in exempt duties in order to qualify for an exemption.

The Final Rule also will permit employers for the first time to count certain bonuses, commissions and incentive payments toward up to 10% of the new salary level.  The DOL unexpectedly gave employers a small amount of flexibility in satisfying the salary basis test, reflecting the market reality that compensation often is not limited to payment of a regular salary.  Employers should note, however, that under the Final Rule such payments must be made on a quarterly or more frequent basis (subject to catch-up payments).

Finally, while employers had feared they would have a very short window to implement changes required by the Final Rule, the DOL has adopted an effective date of December 1, 2016, giving employers six months to comply.

Although less onerous than feared, the announcement of the Final Rule requires employers to take action.

First, employers should conduct internal audits to identify employees who fall below the new salary threshold.  These audits also should be forward looking to identify positions that will need to be examined at least every three years to ensure ongoing compliance with the salary basis test, given the DOL’s announcement that the threshold will be updated every three years.  The DOL expects the threshold will be approximately $51,000 as of January 1, 2020.

Second, if employers have employees who will fall below the new minimum salary level, they must take steps to ensure compliance with the Final Rule.  Employers may consider raising salaries to comply with the new minimum.  Doing so, however, can create broader pay compression issues for employers, which require careful consideration from pay equity and employee relations perspectives.  Alternatively, employers may reclassify employees as non-exempt, rather than raise salaries to the new minimum levels.  That course of action will require renewed focus on timekeeping requirements, policies and practices to prevent off-the-clock work by employees who may be accustomed to the flexibility of working as an exempt employee, and expanded efforts to control work time in order to avoid unexpected overtime costs.

Third, although the DOL did not modify the duties test, employers should strongly consider the “quantitative” analysis in conducting their own internal audits.  Under current law, employers must show that an exempt employee’s “primary duty” involves the performance of exempt work.  An employee’s “primary duty,” generally speaking, is the employee’s most important duty, that is, the responsibilities for which the employee primarily was  hired, rather than secondary duties.  While an employer may be able to show an employee’s primary duty is a job function that requires less than 50% of his or her time, that can be a difficult showing – and employers should remember they bear the burden of proving the applicability of an exemption.  A good practice to minimize the risk of misclassifying employees as exempt is to ensure that exempt employees spend a majority of their work time engaged in exempt duties whenever possible – regardless whether that is strictly required under the FLSA.

More information on the Final Rule is available here.