The Fair Labor Standards Act (FLSA) mandates that employees who work more than 40 hours a week are entitled to overtime pay, unless they meet certain exemptions. In May 2016, the U.S. Department of Labor (DOL) released the Final Rule on Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, (the “Final Rule” or “Overtime Rule”), which originally would have become effective on Thursday, Dec. 1, 2016, but now is delayed.

The Final Rule updates the minimum pay threshold for meeting the salary exemptions for executive, administrative or professional (white collar) employees. Under the FLSA, three tests are used to determine if an employee is exempt from the overtime pay requirements:

1) the employee is paid on a salary basis and not according to quality or quantity of work (salary-basis test);

2) the employee’s pay exceeds a set minimum pay level (salary-level test); and

3) the employee’s duties are consistent with that of a white-collar employee (standard duties test).

The Final Rule modifies the salary-level test. The specific changes are detailed below.

Exemption and Salary Increase
Salaried white-collar employees who are eligible under the standard-duties test, and who work over 40 hours per week, are entitled to overtime pay unless they met the exemption requirements. So, a salaried white-collar employee being paid below the updated salary threshold (non-exempt) generally may be entitled to overtime pay depending upon duties; while a salaried white-collar employee being paid above the updated salary threshold (exempt) may not be entitled to overtime pay.

The Final Rule doubles the minimum standard salary threshold for exemption from $23,660 per year ($455/week) to $47,476 per year ($913/week).

Determining Eligible Employees
Ultimately, the employer is responsible for determining an employee’s exemption status. Although the Final Rule changes the pay-level test, the DOL will not be making any modifications to the current salary-basis or standard-duties tests. The impact of increasing the salary-level test without also modifying the standard-duties test is expected to be significant, as more workers will be classified as non-exempt.

Impact on Employers
Compliance with these updated regulations will require employer diligence. Liabilities for misclassification of an employee’s exemption status can be in the form of back wages, lawsuits and other damages. According to the DOL, there are several options for responding to the updated changes in salary level. For example, employers can raise salaries to maintain exemption status; pay current salaries and overtime pay; change compensation type to hourly with overtime; or reorganize workloads and schedules to minimize overtime.

If an employer chooses to raise a salary to maintain exemption, additional forms of compensation on top of salary may be used, such as non-discretionary bonuses, incentive payments and commissions. These forms of compensation cannot exceed 10% of the standard salary threshold and must be paid at least on a quarterly basis. This means that annual incentive bonuses that employers provide, such as at year-end, will not be factored into the employees’ total salary.

Employers will need to closely track work hours new non-exempt employees to ensure compliance with minimum salary and overtime pay; however, many organizations may already have systems in place for tracking these hours.


John Yanak, CPA with Grossman Yanak & Ford LLP, has over 35 years of experience providing audit, accounting and consulting services to privately-held businesses in numerous industries, as well as not-for-profit organizations, including educational institutions, trade associations and community service groups.