DOL Overtime Rule

Key Provisions of the Final Rule

The Final Rule focuses primarily on updating the salary and compensation levels needed for employees to qualify as Exempt Employees. Specifically, the Final Rule does the following:

• Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, which is $913 per week or $47,476 annually for a full-year worker;
• Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004; and
• Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level.

Notably, the Final Rule makes no changes to the duties tests.

The Effective Date of the Final Rule is Dec. 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,000 per year) will be effective on Dec. 1. Future automatic updates to those thresholds will occur every three years, starting on Jan. 1, 2020.

Nondiscretionary Bonus And Incentive Pay

The Final Rule refers to 29 C.F.R. ' 778.211 for the meaning of nondiscretionary bonus. Notably, 29 C.F.R. ' 778.211(b) defines a “discretionary bonus” as one where “the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid.” By contrast, promised bonuses or bonuses that are the result of collective bargaining “to induce [employees] to work more steadily or more rapidly or more efficiently or to remain with the firm” would constitute “nondiscretionary bonuses.” 29 C.F.R. ' 778.211(c).

Examples of nondiscretionary bonuses recognized by the DOL include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula. See Final Rule: Overtime, Questions and Answers, available at http://1.usa.gov/1sCfexX. Additional examples include individual or group production bonuses, and bonuses for quality and accuracy of work.

Incentive payments, including commissions, are also considered non-discretionary. See Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees (Final Rule), at p. 116, http://1.usa.gov/1rlOgtb. Notably, through public comments, the Department was convinced that:

[I]t is not uncommon for employees who are not sales personnel, such as supervisors of a sales team, to earn commissions based on the sales of the employees they supervise. Since such supervisors may satisfy the duties test, the Department has concluded that it is appropriate to treat commissions like other types of nondiscretionary bonuses and permit them to be used to satisfy a portion of the salary level test.

Final Rule, at p. 127.

As such, exemption status will not depend on “whether an employer chooses to label or structure a nondiscretionary incentive payment as a “bonus” or as a “commission.” The following do not count as incentive payments and remain excluded from the salary level test: discretionary bonuses; board, lodging or other facilities; payments for medical, disability, and life insurance; contributions to retirement plans; and other fringe benefits. See Final Rule, at p. 127.

10% Limit and Catch-Up Payment

The Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the required weekly minimum salary level. This is the first time the DOL has included nondiscretionary bonuses, incentive payments, and commissions to satisfy the salary level test for Exempt Employees. See Final Rule, at p. 128. As such, it may revisit this threshold if future circumstances support a change.

Under the Final Rule, in order for nondiscretionary bonuses and incentive payments (including commissions) to satisfy a portion of the salary level test, such compensation must be paid at least quarterly. Final Rule, at p. 129. The DOL explains in the Final Rule as follows:

Each pay period an employer must pay the exempt executive, administrative, or professional employee on a salary basis at least 90 percent of the standard salary level required in ” 541.100(a)(1), 541.200(a)(1), or 541.300(a)(1), and, if at the end of the quarter the sum of the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 13 weeks, the employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level). Any such catch-up payment will count only toward the prior quarter's salary amount and not toward the salary amount in the quarter in which it was paid. For example, assume Employee A is an exempt professional employee who is paid on a weekly basis, and that the standard salary level test is $913 per week. In January, February, and March, Employee A must receive $821.70 per week in salary (90 percent of $913), and the remaining $91.30 in nondiscretionary bonuses and incentive payments (including commissions) must be paid at least quarterly. If at the end of the quarter the employee has not received the equivalent of $91.30 per week in such bonuses, the employer has one additional pay period to pay the employee a lump sum (no greater than 10 percent of the salary level) to raise the employee's earnings for the quarter equal to the standard salary level.

Next Steps for Employers

As employers rush to consider the implications of the Final Rule, they will want to pay close attention to how they classify certain types of employee compensation in order to ensure that they take full advantage of the 10% allowance for nondiscretionary bonuses and incentive payments.

In order to qualify as a nondiscretionary bonus under the Final Rule and counted as part of an Exempt Employee's earnings for up to 10% of the standard salary level, the incentive in question must be communicated to the subject employees as a promised form of compensation (i.e., a bonus, incentive payment, or commission), presumably for the purpose of inducing the employees “to work more steadily or more rapidly or more efficiently or to remain with the [company].” 29 C.F.R. ' 778.211(c).

As such, in order to ensure that a payment is considered a nondiscretionary incentive under the Final Rule to account for up to 10% of the required salary level, employers should consider the following:

1. Ensure that non-discretionary compensation is contractually referred to as “bonus” or “incentive payment” or other comparable term;
2. Monitor the amount of incentive payments made to Exempt Employees to ensure that the salary level test is met each quarter;
3. Make a catch-up payment to any Exempt Employee that does not reach the required salary level at the end of a particular quarter (by no later than the pay period following the end of the subject quarter); and Inform Exempt Employees of their eligibility for this bonus or incentive payment and how it will be applied to their total compensation.

If employers have questions regarding what can be rightly classified as a nondiscretionary incentive, or need specific guidance regarding how to appropriately update employment materials, procedures, and protocols, they should contact qualified employment counsel.

Dana A. Kravetz is the Managing Partner of Michelman & Robinson, LLP (M&R), and leads the firm's Employment Litigation Practice Group. Taylor Burras is an Associate with the firm.