Just hours ago, the U.S. Department of Labor (DOL) released its highly anticipated proposed revisions to the Fair Labor Standards Act’s (FLSA) so-called “white collar” exemptions, the first major update to the federal overtime rules in more than a decade. Although the proposed rule more than doubles the pay threshold for exempt employees – from $455/week to $970/week – the DOL, in a surprise move, did not address the “duties” tests associated with the exemptions, as many had anticipated.
The FLSA, enacted by President Franklin D. Roosevelt as part of the New Deal, requires generally that all employees earn at least the federally mandated minimum wage (currently, $7.25/hour) plus time-and-a-half for all overtime hours – i.e., all hours worked above 40 in a given week. The law, however, contains exemptions for, most notably, bona fide executives, administrators, and professionals (known more commonly as the “white collar” exemptions). Under these exemptions, workers need not receive: (1) an hourly rate of pay or (2) overtime for any time worked in excess of 40 hours in a given week. Instead, exempt employees may be paid a fixed weekly salary. In order for an employee to be properly classified as exempt from the FLSA’s minimum wage and overtime regulations, his/her salary level and job duties must first satisfy certain threshold criteria. These criteria are referred to, respectively, as the “salary basis” and “duties” tests.
Under the current salary basis test, exempt employees must earn at least $455/week to maintain their exempt status. Critically, an exempt employee’s salary may not fluctuate from week to week. Rather, subject to a few narrow exceptions, such salary must remain constant regardless of the number of hours worked or quality of work performed. Fluctuations, even sporadically, in an exempt employee’s salary, may forfeit an employer’s right to claim that an employee is exempt.
In addition to satisfying the salary basis test, an exempt employee’s job duties must satisfy the “duties” test for one or more of the recognized exemptions, which differ from exemption to exemption. The employee’s primary duty – the principal, main, major, or most important duty that the employee performs – must be to engage in exempt duties.
If an employee satisfies both the salary basis and duties requirements for a particular exemption, then he/she is classified as exempt under the law and is not eligible to receive pay.
The DOL’s Proposal
In March 2014, President Obama directed the DOL to modernize existing overtime regulations for the “white collar” exemptions. In response to the president’s mandate, the DOL began preparing a proposed regulation entitled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees.” The proposal, which took more than 14 months from inception to publication, was expected to narrow the “white collar” exemptions – thereby making more workers eligible for overtime pay under federal law – by: (1) increasing the salary threshold for exempt employees from the current $455/week level, and (2) modifying the respective duties tests to make it more difficult for an employee to qualify as exempt from the FLSA’s minimum wage and overtime regulations.
The proposed regulation released Tuesday, however, only addresses the first of these two prongs. Specifically, the DOL’s proposal would more than double the minimum salary for exempt employees, from slightly less than $24,000 per year to $50,440 (or $970/week). Going forward, the salary basis test will be indexed to the 40th percentile of weekly earnings for full-time salaried workers, and the proposed rule would allow the DOL to automatically update the minimum exempt salary on an annual basis without the need for further rulemaking. Practically speaking, this means that once the proposed regulations take effect, otherwise exempt workers earning less than the increased salary threshold – which may change from year-to-year – must be re-classified as non-exempt (i.e., they must, generally, be paid an hourly wage and earn overtime at time-and-a-half).
Surprisingly, the proposed regulation does not modify the duties tests associated with the “white collar” exemptions. Some commentators had expected the DOL to adopt the approach of states like California, which requires that exempt workers spend a particular amount of time performing exempt duties. Instead, “the [DOL] is seeking comments on whether the current duties tests are working as intended to screen out employees who are not bona fide ‘white collar’ exempt employees.” Some pundits nevertheless speculate that the DOL will still roll out revamped “duties” tests at a later date.
Among the ancillary provisions is the DOL’s request for comments on “whether to allow nondiscretionary bonuses, such as certain production or performance bonuses, to satisfy a portion of the standard salary test requirement. Such bonuses include for example, nondiscretionary incentive bonuses tied to productivity and profitability.” Moreover, the proposed rule would increase the annual compensation level for the “highly-compensated employee” exemption, an amalgam of the “white collar” exemptions, from $100,000 to $122,148, and thereafter index such compensation to the 90th percentile of income for full-time salaried workers.
Before it becomes final, the DOL’s proposed regulation will be subject to a public comment period and finalization. Whatever iteration is ultimately adopted, the final overtime rule is not likely to take effect before mid-2016.
Tips for Employers
- Be proactive – initiate a review of all categories of employees who may be affected by the proposed regulation and reclassify those positions as necessary
- Engage key personnel throughout your organization to alert them to this new development and the increased cost of complying with the mandate once it becomes law
- Consider updating and/or implementing relevant policies, including any rules regarding the reporting of hours worked and the maximum number of hours worked per week without authorization by a supervisor.
- Provide training to the affected employees (including those responsible for ensuring compliance).