On May 18, 2016, the Department of Labor (DOL) released final rules that will substantially increase the minimum salary requirement to qualify for exemption under the Fair Labor Standards Act’s White Collar exemptions.  A brief overview of the final rules, effective December 1, 2016, is below:

• Minimum salary requirement increases to $913 per week for the administrative, professional (including salaried computer professional), and executive exemptions.
• For the first time, certain bonuses and other incentive payments can help employers meet the minimum salary requirement for these exemptions.
• Minimum salary requirement for the highly compensated employee exemption increases to $134,004 in total annual compensation.
• There will be automatic adjustments to these minimum salary requirements every three years, beginning January 1, 2020.

This week’s Tip focuses on some questions frequently asked about bonuses and incentive payments as they relate to the new overtime rules.

Q: What is changing about bonuses with respect to the administrative, professional, and executive exemptions?

A: Beginning December 1, 2016, employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly. This means that the maximum nondiscretionary bonus or incentive payment that can apply toward the employee's weekly minimum salary is $91.30 (10 percent of $913). Previously, employers were prohibited from counting any portion of these forms of compensation toward meeting the minimum salary requirement.

Q: What are nondiscretionary bonuses?

A: While the final rules don't define nondiscretionary bonuses, the DOL has said that nondiscretionary bonuses are generally announced or promised in advance to induce employees to work more efficiently or to remain with the company. Examples include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula. Most bonuses are considered nondiscretionary. By contrast, discretionary bonuses aren't announced or promised in advance. For example, if you decide at the end of the year to surprise employees with a bonus, this would generally be considered a discretionary bonus. Discretionary bonuses may not be counted toward meeting the minimum salary requirement.

Q: Does the new rule regarding nondiscretionary bonuses apply to highly compensated employees?

A: For the highly compensated employee exemption, employers are already allowed to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation toward meeting the total annual compensation requirement. In fact, these types of payments often make up a large percentage of the highly compensated employee's compensation. This doesn't change under the final rules. As long as the employer pays highly compensated employees at least $913 on a weekly salary basis, the employer can count these other forms of compensation toward meeting the minimum total compensation requirement ($134,004 per year).

Q: Can I change from discretionary bonuses to nondiscretionary bonuses so I can count them toward the minimum salary required?

A: By definition, discretionary and nondiscretionary bonuses are designed for different purposes. Discretionary bonuses are not disclosed in advance, whereas a nondiscretionary bonus is predetermined based on set criteria. If you intend to introduce a nondiscretionary bonus program, make sure you decide in advance the specific criteria for the bonus, apply your criteria consistently, and communicate bonus requirements to employees.

Q: How does the rule work if I don't pay bonuses every week?

A: As long as you pay the employee a nondiscretionary bonus at least quarterly plus a weekly salary of at least $821.70 (90 percent of the minimum), then you can generally take advantage of this rule. For example, if you pay the employee $821.70 per week and a bonus of $1,186.90 ($91.30 x 13 weeks) every 13 weeks, it would equal the same amount as if you had paid your employee a salary of $913 per week.

Q: What if I decide not to make the catch-up payment?

A: If an employer does not make the catch up payment, the employee would be entitled to overtime pay for any overtime hours worked during the quarter in which the employee did not receive at least the minimum salary requirement.

Q: What does it mean that nondiscretionary bonuses must be paid at least "quarterly?" Is it the calendar quarter? Fiscal quarter?

A: It means the time between such payments must be 13 weeks or less. Employers can decide when the quarter begins, and then the bonus payment must be made by the end of that quarter to count toward the minimum salary requirement. For example, if you would like to capitalize on the rule from day one, your first bonus payment would generally need to occur within 13 weeks of December 1, 2016.

Q: What if my company's quarter for bonus purposes will start on January 1, 2017, not December 1, 2016?

A: You must generally make your bonus payment within 13 weeks of January 1, 2017, for it to apply toward 10 percent of the minimum salary requirement during that time period. From December 1, 2016 through December 31, 2016, you would be required to pay the full minimum of $913 per week.

Q: Can I start applying bonuses toward meeting the minimum salary requirement for the administrative, professional, and executive exemptions before December 1, 2016?

A: No. The new rules take effect December 1, 2016.

Q: What happens when the minimum salary requirement is automatically adjusted in three years?

A: Employers may apply nondiscretionary bonuses and other incentive payments toward meeting up to 10 percent of that new amount.

Q: My company pays for the full cost of health insurance for all employees. We also provide lodging and meals to some employees. Can I count these and other benefits toward meeting the minimum salary requirement for exemption?

A: Only a direct salary and nondiscretionary bonuses and other incentive payments may count toward meeting the minimum salary requirement.

As always, if you have any questions about the content of this Tip, please contact your Relationship Manager or Service Team.