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New Overtime Rules: U.S. Department of Labor Increases Salary Requirements for Exempt Employees

Attorney: Mary Watson Fisher, Sage R. Knauft | Published 5.18.16

The U.S. Department of Labor (DOL) issued a much-anticipated final rule today which more than doubles the minimum yearly salary of exempt salaried employees from $23,660 to $47,446. Once the rule goes into effect on December 1, 2016, any salaried employee who does not earn at least $913 per week will no longer qualify for the so-called “white-collar exemption” and will have to be paid overtime for any hours worked in excess of 40 hours per week. The DOL anticipates that the new rule will extend overtime protections to more than 4.2 million workers and will result in a net increase of approximately $1.2 billion per year in wages paid to employees nationwide.

The rule also includes an automatic update provision every three years to adjust the minimum salary to equal the 40th percentile of full-time salaried employees in the lowest income region. It is anticipated that the first adjustment on January 1, 2020, will raise the minimum salary to more than $51,000 per year.

Importantly, the new rule does not change the duties requirements that are used to determine if a managerial, administrative or professional employee qualifies for the white-collar exemption under the Fair Labor Standards Act. Thus, employees who have qualified for the exemption in the past based on their job duties will continue to qualify as exempt employees as long as their salary meets the new minimum.

Notably, the new federal standard sets a higher minimum salary for exempt employees than the standard under California law (currently $41,600 per year) and could have wide ranging impact on labor costs for California employers. In industries such as fast food and retail, employers may be forced to re-classify many of their managers and assistant managers who do not make the minimum salary as non-exempt employees and start tracking their hours. In addition, employers may be forced to re-examine whether their salaried employees can engage in certain customary activities, such as answering work emails after hours, due to higher overtime costs.