DOL clarifies effective date for HCE exemption

In response to an inquiry from the editors of PAYROLL MANAGER’S LETTER, the Department of Labor (DOL) has clarified how the December 1, 2016, effective date applies to the highly compensated employee exemption.

What the regulations say

A highly compensated employee (HCE) will qualify for exemption from the overtime requirement of the
Fair Labor Standards Act (FLSA) if he or she meets a streamlined duties test and a salary test. To pass the duties test, the employee’s job must regularly involve any one of the duties of an executive, administrative, or professional employee. The salary level test for an HCE includes both an annual and weekly component.

The new final regulations specifically provide that: “As of December 1, 2016, and until a new amount is published in the Federal Register by the Secretary and becomes effective, such an employee must receive total annual compensation of at least $134,004 [29 C.F.R. §541.601(b)].

Furthermore, the regulations specify that this annual compensation must include a weekly amount equal to the required salary amount for the standard white-collar exemptions—that is, $913 per week as of December 1, 2016.

What we asked

It is unclear how the December 1, 2016, effective date works with respect to the new annual compensation requirement for the HCE exemption. For example, assume that an HCE (who meets the streamlined duties test but who would not meet the duties test for any of the other white-collar exemptions) currently earns just over $100,000 for calendar year 2016 ($1,924/week). If the employer does nothing to change the employee’s compensation so that the employee will not meet the $134,004 annual compensation requirement for calendar year 2016, will the employee become nonexempt only for the period from December 1, 2016, forward, or will the employee become nonexempt for all of calendar year 2016?

If the employer wishes to preserve the employee’s exempt status from December 1, 2016, forward, does the employer have to increase the employee’s compensation to $134,004 for the entire 2016 calendar year? Or, can the employer increase the employee’s compensation only for the fiscal year beginning December 1, 2016—for example, by raising the employee’s salary to $2,577 per week ($134,004/yr) for the fiscal year beginning December 1, 2016?

The DOL’s answer

PAYROLL MANAGER’S LETTER received the following response from the DOL’s Office of Public Affairs:
“The final rule will become effective on December 1, 2016. From that date forward, an employee who meets the HCE duties test but does not meet the standard duties test and is paid less than $913 per week and $134,004 annually will be eligible for overtime pay, unless another exemption applies. The final rule will not affect the exemption status prior to December 1, 2016, of an employee who satisfies the HCE duties test but does not meet the standard duties test and earns at least $455 per week on a salary basis and $100,000 in total annual compensation. In assessing compliance with the HCE exemption prior to December 1, 2016, WHD will prorate the annual compensation requirement.

An employer may utilize any 52-week period as for the total annual compensation requirement, such as a calendar year, a fiscal year, or an anniversary of hire year. If the employer does not identify some other year period in advance, the calendar year applies [DOL Office of Public Affairs Communication, 6/24/2016].”

MORE Qs&As

For answers to other key questions about the new regulations, see DOL Answers Key Questions About the New Overtime Rules in the July 21, 2016 issue of the PAYROLL MANAGER’S LETTER. (Reproduced from the PAYROLL MANAGER’S LETTER, July 21, 2016.)

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