GM 16-035

Department of Labor Updates Salary Basis Test for Overtime Determination

On May 18, 2016, the Department of Labor (DOL) pre-published a final rule that will expand the definition of salaried employees who are eligible to receive overtime pay. The final rule and related documents can be accessed here: The new rule more than doubles the minimum amount of salary that is used as one prong of the exemption test for employees in executive, administrative, and professional positions, from a level of $23,660 per year, to $47,476 per year. “White collar” employees—even those previously “exempt” from overtime—who make less than this amount will soon be eligible for overtime. We believe this may affect the employees of many tribes and tribal entities.

The overtime rules are authorized by the Fair Labor and Standards Act (FLSA), which generally requires that workers who work more than 40 hours in a workweek receive time-and-a-half as overtime pay. There is an exemption from this rule for “bona fide executive, administrative, or professional” employees. This is generally referred to as the “white-collar” exemption from overtime rules. We note that these changes do not apply to employees paid by the hour or piece, independent contractors, or outside sales employees.

Previously, an employee in one of these positions would be “exempt” from overtime if he or she was paid a salary of at least $23,660 per year, the salary was fixed and not subject to reduction because of the amount or quality of work, and who met the DOL tests and standards showing their duties were sufficiently executive, administrative or professional. Effective December 1, 2016, the new salary level will increase to $47,476 (the other two criteria are unchanged). All factors of this test must be met, meaning that even if an employee is paid by salary and does primarily these white-collar duties, he or she will still be eligible for overtime if making less than $47,476 per year.

The salary threshold was last updated in 2004, and is officially based on a weekly wage. The new rule is officially based on the lowest-wage region (the South) of four large national Census regions, and is set so that the lowest-paid 40 percent of salaried workers would be caught by the new rule. While the rule more than doubles the floor for the salary basis test, it does state that an employer may count up to ten percent of the salary level in non-discretionary bonuses, incentives, or commissions that are paid at least quarterly. Governmental employers (though not specifically tribes, see below) may use “comp time” (1.5 hours for each overtime hour worked) instead of overtime payment in some circumstances.

The rule also updates the salary level for exemption of “Highly Compensated Employees” (HCEs). HCEs exempt from overtime are those employees whose work is not primarily executive, administrative, or professional in nature (but who perform duties at least minimally so), and make over a certain salary. This level was previously $100,000 a year, but will now be $134,004 a year.

Finally, the rule provides that these levels will update automatically every three years, beginning on January 1, 2020, based on the same criteria.

While several tribal governments and intertribal organizations commented on this rule and its potential impact for tribes in their capacity as employers, it is worth considering whether the FLSA is applicable to tribes. Though it is not a settled question whether the FLSA applies to tribes, we know that many tribes and tribal organizations follow the overtime rules.

The FLSA and the rules do not make specific mention of tribes, nor do they explicitly abrogate tribal sovereign immunity. As such, the FLSA is a “statute of general applicability,” and there is an open question as to whether such statutes apply to tribal governments and arms of tribes. Some federal courts have held that the statute does not apply to tribes, but for differing reasons ranging from the fact Congress did not waive tribal sovereign immunity to a closer consideration of whether an employee’s work was sufficiently related to tribal self-government. The Seventh and Ninth Circuits have held that the FLSA does not apply if the employee’s work is sufficiently related to tribal self-government. In contrast, the Eleventh Circuit has held that the statute is not enforceable against tribes, finding that Congress did not intend to abrogate tribal sovereign immunity. The Ninth Circuit has held that the FLSA applies to on-reservation businesses owned by individual tribal members. No court has determined whether tribes are “governments” for the purposes of using comp time allowed under these rules.

Several tribal commenters requested an exemption or special rules for tribal employers, noting the law does not address tribes, but DOL stated that since “the Department did not propose any different treatment for [governmental employees] or ask any questions in the NPRM [Notice of Proposed Rulemaking] about such a change, [DOL] believe[s] the special provisions sought are beyond the scope of this rulemaking.”

Please let us know if we may provide additional information or analysis regarding the new overtime rules.