Department of Labor Increases the Minimum Exempt Salary Threshold Effective December 1, 2016
Posted May 19, 2016

On Wednesday, May 18, 2016, the Department of Labor issued its final rule regarding changes to the white-collar overtime exemptions under the federal Fair Labor Standards Act ("FLSA"). The new rule will become effective on December 1, 2016.

The final rule increases the federal minimum threshold for salaried exempt employees from $455 per week or $23,660 per year, to $913 per week or $47,476 per year. This new threshold surpasses the California minimum exempt salary threshold, which is $41,600 (based upon California's calculation of two times the current minimum wage of $10 per hour). This makes the minimum exempt salary basis one of the very few areas where federal law is more restrictive than California law, rendering the California standard irrelevant once the DOL final rule is in effect.

An employer may apply earned commissions or non-discretionary bonuses to meet up to 10% of this federal minimum salary threshold, so long as this additional compensation is paid to employees at least quarterly. Annual bonuses would not qualify for this option. California law, on the other hand, looks solely at base salary to determine if the employee is paid the minimum threshold. At this time, if an employer applies 10% of the employee's monthly or quarterly commissions or non-discretionary bonuses to meet the federal threshold, the total compensation paid would exceed the California minimum even after the commissions and bonuses were deducted, but employers should be aware that this protection may disappear as California's minimum wage increases in the coming years.

Federal law also has an exemption for “highly compensated employees” (HCEs). Under certain circumstances, these employees can be exempt from all overtime regardless of their job duties. Under the new federal standard, this HCE threshold will be raised from $100,000 to $134,004. Note, however, that California has no such HCE exemption and this federal exemption cannot be used for California employees.

The final rule also establishes a mechanism for automatically increasing the federal threshold every three years, with the first update set to occur on January 1, 2020.