Under the newly proposed overtime regulations for the Fair Labor Standards Act (FLSA), the most significant changes are to the minimum salary threshold that must be met for an employee to qualify as exempt. It’s important to understand what types of compensation are included in determining whether “minimum threshold salary” requirements have been met and how the concept is applied in determining exempt status. 
Changes under proposed regulations
The proposed regulations will increase the minimum annual salary required for exempt status, removing exemptions for millions of employees and requiring that they be paid overtime for all hours they work in excess of 40 in a workweek. An employer should begin to analyze the impact of the proposed regulations by determining which of its employees meet the minimum salary threshold.
Under the proposed regulations, the minimum salary threshold for exempt employees will increase from the current $455 per week ($23,660 per year) to an anticipated $50,440 per year (or $970 per week) in 2016. Importantly, the threshold will be adjusted annually to either the 40th percentile of earnings for full-time nonhourly employees computed by the U.S. Department of Labor (DOL) or to changes in the Consumer Price Index for All Urban Consumers (CPI-U), to be determined in the final regulations.
Compensation included in salary threshold
Although employees who qualify for exempt status must be paid on a “salary basis,” they don’t have to be paid weekly or paid the same amount every week. Most states have laws regarding the frequency of wage payments, including on a weekly, semimonthly, or monthly basis.
You may pay employees other types of compensation in addition to salary, including commissions or even overtime, without jeopardizing their exempt status, but you may not include that compensation when determining whether they have satisfied the minimum salary threshold. Furthermore, while board, lodging, and “other facilities” are included in determining minimum wage compliance, those things don’t apply when determining whether an employee meets the minimum salary threshold. Thus, you may not count meals, housing, or transportation for ordinary commuting furnished to employees.
Inclusion of bonuses
Current FLSA regulations don’t permit inclusion of nondiscretionary bonuses when calculating whether the minimum salary requirement has been met, but the proposed regulations would allow inclusion of bonus income if it is paid at least monthly and doesn’t constitute more than 10 percent of total salary.
Also, under the current regulations, if an employee’s total annual compensation doesn’t meet the minimum salary threshold, the employer is permitted, during the last pay period or within one month after the end of a 52-week period, to make one final payment sufficient to achieve the required level. This “catch-up” payment would not be allowed under the proposed regulations.
Minimum salary threshold for HCEs
The proposed regulations continue to grant exempt status to “highly compensated employees” (HCEs) but would raise the minimum salary threshold from $100,000 per year to the 90th percentile of full-time salaried workers as determined annually by the DOL (currently $122,148 annually). Employees who meet the minimum salary threshold for HCE exemption qualify if they “customarily and regularly” perform one or more of the exempt duties of an executive, administrative, or professional employee.
Need to learn more?
Now that the DOL’s newly proposed overtime exemption rules are closer to becoming final, “exempt vs. nonexempt” is, understandably, one of the hottest HR issues today. Once the new rules are in effect, any one of many possible management mistakes could put your exempt employees’ status in jeopardy, making them entitled to overtime compensation and creating a huge liability for your organization. Plus there is the risk of fines for FLSA violations. The November 10 BLR webinar Overtime Exemptions At Risk: How to Classify Employees and Comply with the New FLSA will show you the trouble spots to watch for—and the proactive strategies for minimizing your legal risks. For more information, go to http://store.hrhero.com/events/audio-conferences-webinars/overtime-111015.
Bottom line
Any analysis of the impact of the proposed FLSA overtime regulations should begin with ascertaining which employees meet the minimum salary threshold requirements for exempt status under both the existing and the proposed regulations.
Robert P. Tinnin, Jr. is a partner in Tinnin Law Firm, A Professional Corporation in Albuquerque, New Mexico. He may be contacted at rtinnin@tinninlawfirm.com.