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  • September 26, 2016

    New Department of Labor Overtime Regulations Allow Use of Non-Discretionary Bonuses and Incentives to Meet Salary Basis

    The Department of Labor’s new overtime rules go into effect Dec. 1, 2016. In addition to increasing the salary level required to satisfy the white collar exemption, the new rules affect how nondiscretionary bonuses, incentive payments, and commissions may be used to meet the salary level requirement.

    Caitlin Madden

    This spring, the Department of Labor (DOL) issued its final rule updating the minimum wage and overtime exemptions for executive, administrative, professional, outside sales, and computer employees (the “white collar” exemptions). An employee must meet certain minimum requirements in order to be considered exempt, including in most instances that the employee be paid on a salary basis at a certain minimum amount, and that the employee’s primary job duties meet the duties tests outlined by the DOL. The new salary level has been widely publicized, but the new rules will also allow employers to use certain non-discretionary payments to partly satisfy the salary requirement for the first time.

    Caitlin Madden Caitlin Madden, U.W. 2014, is an associate attorney with Hawks Quindel S.C. in Madison, where she represents employees and specializes in wage and hour and general employment law.

    The New Salary Level

    When the white collar exemptions were last updated in 2004, the salary level required to satisfy the salary basis test was $455 a week, or $23,660 annually. The new rule sets the salary level at $913 a week, or $47,476 annually. The new rules also raise the salary level for the highly compensated employee exemption from $100,000 annually to $134,004. In addition, the new rule requires the salary basis level for these exemptions increase every three years. Each update will raise the salary level to the 40th percentile of full-time salaried workers in the lowest-wage census region. The first update will take place on Jan. 1, 2020. The DOL will give 150 days’ notice of the new salary level.

    Up to 10 Percent of Salary May be Satisfied with Non-Discretionary Bonuses, Incentives, and Commissions

    In addition to increasing the salary level, the new rules will permit employers to allow up to 10 percent of the salary level for exempt executive, administrative, and professional employees to be met by non-discretionary bonuses, incentive pay, or commissions. See 29 C.F.R. 541.602(a)(3). With the new basis of $47,476 annually, this means up to $4,747 of an exempt administrative, executive, or professional employee’s compensation may be satisfied with one of these nondiscretionary methods of pay.

    Previously, the salary level could only be met by the actual salary or fee payments made to an employee. It is important to note that this applies to non-discretionary methods of compensation. Discretionary bonuses still cannot be used to meet the salary level test.

    The rule did not change the DOL’s longstanding position that board, lodging, and other facilities are not to be included in calculating the salary level. Nor are other sorts of compensation, such as medical, disability, or insurance payments, contributions to retirement plans, or other fringe benefits.

    Nor does this rule affect employees classified as exempt under the highly classified employee exemption, who must receive at least the standard salary amount of $913/week without including nondiscretionary bonuses, incentives, and commissions, while the remainder of their total annual compensation may include these payments.

    Such Compensation Must be Paid Quarterly

    For an employer to use non-discretionary bonuses, incentives, and commissions to satisfy the salary basis for exempt executive, administrative, or professional employees, such compensation must be paid quarterly or more frequently. An annual bonus or incentive, therefore, could not be used.

    The new regulation also allows for a “catch-up payment.” If at the end of a quarter, the employee’s weekly salary plus non-discretionary bonus, incentive, and commission payments does not equal 13 times the weekly salary amount required to meet the salary basis (or $11,869), the employer must make a payment for the difference. This payment must be made by the next pay period after the end of the quarter, and will count toward that prior period’s salary amount, not the quarter in which it was paid.

    More questions will surely arise as these new rules go into effect. But regardless of the changes presented by the new salary level rules, a careful review of the actual job duties performed by employees classified as exempt to ensure compliance with federal regulations is prudent.

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    Labor & Employment Law Section Blog is published by the State Bar of Wisconsin; blog posts are written by section members. To contribute to this blog, contact Andrea Farrell and review Author Submission Guidelines. Learn more about the Labor & Employment Law Section or become a member.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

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