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Focus on Taxation: Change to Minimum Salary Level to Qualify for Exempt Status

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The Department of Labor (DOL) published its final rule concerning the minimum salary level necessary in most cases for an employer to qualify as exempt from overtime pay under the Fair Labor Standards Act (FLSA). In the absence of an exemption, the FLSA provides that an employee is entitled to receive pay at the rate of time and one-half for all hours worked over 40 in a week.
June 2, 2016

The Department of Labor (DOL) published its final rule concerning the minimum salary level necessary in most cases for an employer to qualify as exempt from overtime pay under the Fair Labor Standards Act (FLSA). In the absence of an exemption, the FLSA provides that an employee is entitled to receive pay at the rate of time and one-half for all hours worked over 40 in a week. Under the new rule, which goes into effect on December 1, 2016, the minimum salary level for potential application of most exemptions from overtime pay is $47,476 per year ($913 per week).

The final rule also makes one change regarding what pay counts in determining if the minimum salary has been met. Currently, only regular salary payments count toward the $23,660 minimum salary. Under the new rule, up to 10% of the new minimum salary level may be satisfied by nondiscretionary bonuses and incentive payments, including commissions, provided that those amounts are paid on at least a quarterly basis.

The final rule also increases the threshold pay level for being classified as a “highly compensated employee.” That classification was introduced in 2004. For employees who meet the pay threshold for the highly compensated employee classification, the duties tests are relaxed, although not eliminated. The minimum annual pay level to quality as a highly compensated employee will increase from $100,000 per year to $134,004 per year with adjustments.

Previously existing exceptions to the general applicability of the minimum salary standard remain in place. Classifications of exempt employees include:

  • Outside sales employees

  • Teachers

  • Doctors practicing medicine

  • Lawyers practicing law

  • Medical residents and medical interns

  • Employees covered by the FLSA’s Motor Carrier Act exemption

  • Business owners with at least a bona fide 20% vested equity interest in their employer who are actively engaged in management of the employer

     

    Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

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