Key Provisions of the Final Rule
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative, and Professional workers to be classified as exempt. Specifically, the Final Rule:
- Sets the standard salary level at the 40th percentile of earnings of full-timed salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $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 ($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 non-discretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the new standard salary level.
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) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
So what does this mean? How do organizations prepare for these changes? Be proactive, and review two things today: your organization's job descriptions and current salary ranges.
Job Descriptions: If your job descriptions are based on the FLSA Administrative, Professional, or Executive exemption test, then you should already be in compliance with the new ruling and shouldn't have too much to be concerned with other than meeting the new salary threshold. Why? Because the major concern and / or determining factor in classifying a job's exemption status is the positions' use of discretion and independent decision-making. For instance, both a supervisor and a team leader can making, whereas a team leader will not have the same independence or impact in his/her decision making over a team. Although both positions involve some form of supervision over two or more employees, they are not in the same Executive exemption category.
Key areas to clarify and include in your job descriptions that will help distinguish the level of the position are the following:
- The level of discretion required and justified by the essential functions of the job.
- The level of independent judgement required to meet the essential functions of the job.
- Minimum education requirements required to perform the essential functions of the job.
- The number of employees, if any, the position directly supervises
- Clarification of the position's impact in recommending actions that impact supervised employees, such as hiring firing, and setting salary levels.
Salary Threshold: Paying at or above the new minimum salary level for maintaining exemption status under the FLSA may create salary compression and impact your organization's current pay / grade system. A trend among recent Astron client projects is to separate one pay system into two: Non-exempt and Exempt. For the exempt salary structure, set the lowest range minimum at the new threshold ($913 / week, or $47,476 / year). Client organizations are find that this grade separation allows for better pay system administration, while maintaining compliance with the FLSA regulations.
Pay compression may occur if you then need to adjust individuals to the new exempt pay threshold and their new salaries are at or above either their supervisors' or employees with more experience in the same position. Astron recommends conducting a thorough compression review of at least the bottom two pay grades in the new exempt job family. Keep in mind while conducting the compression analysis that 10% of the employee's total pay for meeting the threshold can come from non-discretionary bonuses / incentives paid out quarterly.
Is your organization considering reviewing your job descriptions as a result of the new rule? One of our Flare® modules is designed to make updating job descriptions easy! We also have a job evaluation module with a built-in Position Description Question (PDQ) that can help you determine position exemption status, and a module for creating organizational charts. Why not contact us today to learn more? If you would like to learn more about how to best audit your pay systems in light of the FLSA changes, contact us to learn more about our compensation strategy design services.
Has your organization already created a game plan to meet the new requirements form the Final Rule? We'd love to hear your insights and suggestions!