On May 18, 2016, the Department of Labor (DoL) published their new overtime exemption Final Rule. This was the culmination of nearly two years of work by the DoL to update the Fair Labor Standard Act’s (FLSA) white collar overtime rules, and is the most significant update in more than 40 years.The new rule increases the minimum salary (or “standard salary level”) that must be paid to overtime exempt workers from $455 per week ($23,660 for a full-year worker) to $913 per week ($47,476 for a full-year worker). These levels will update automatically every three years, beginning on January 1, 2020, to maintain the earnings percentiles.Here, we will explore how the new standard salary level was determined.

The Relationship Between the New Standard Salary Level and the Duties Test

In explaining how the DoL set the new standard salary level, it is helpful to first recap the three basic factors that go into determining if an employee is exempt from overtime protections. In a nutshell, they must meet all three of these requirements:

1. Receive a salary rather than an hourly rate of pay
2. Be paid an amount over the salary threshold (the standard salary)
3. Be a bona fide Executive, Administrative, Professional, Computer or Outside Sales employee as determined by a duties test (For an in-depth explanation of duties tests, see this previous blog post.)

In updating the overtime rules, the DoL decided not to revise the third factor—the current standard duties test. That meant that the new standard salary level would need to work with the current test to effectively distinguish between bona fide white collar employees, and those who perform some white collar duties but who should be overtime eligible.To accomplish this, the DoL set the new salary threshold at a level reflective of employees who historically have received overtime protections from those who have not. Specifically, they noted that the current standard duties test is substantially similar to the former “short” duties test, which before 2004 had been associated with a higher standard salary. The DoL sought to restore this historical relationship between having a less rigorous duties test and an appropriately high standard salary.Setting a salary level significantly below the level proposed by the DoL would have necessitated a return to a more rigorous, detailed duties test that sets specific limits on the performance of nonexempt work, like the “long” duties test that existed before 2004. Instead, the higher standard salary performs more of a screening function.

The 40th Percentile: Taking Into Account Region and Industry

In setting the new national standard salary level, the DoL took into account that salaries are lower in some regions and in some industries than others.For this reason, they set the new standard salary level equal to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region. Currently, this is the South Region.The Department choose this level because it was at the low end of the historical range of “short” duties test salary ratios, and would be appropriate across all regions and industries, providing relief for employers in low-wage industries.The DoL also determined that this level represents the most appropriate line of demarcation between exempt and overtime-eligible white collar employees. This again aids in distinguishing between exempt and nonexempt employees, without the return to the more rigorous “long” duties test.

Conclusion and Implications

The effective date of the Final Rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) will be effective on that date.When the rule changes take effect, workers who are currently exempt and do not make more than this new standard level must either have their salaries raised above it, or begin to receive overtime protections. The DoL estimates this will affect more than 4.2 million workers.