The prognostication efforts are going into high gear as employers seek to forecast and prepare where the Department of Labor may land on its final overtime rules.  As with all rules in the post-comment phase, government officials have not given any indication on when the final rules will be published (and become effective) or what they will contain.  Our insight is the final rule will be published ahead of schedule before the July regulatory agenda date, perhaps as soon as later this month.  The Congressional Review Act deadlines (described here) strongly indicate that the DOL will seek to avoid the prospect of any effective congressional action on the final rules.  As to the final rule’s content, we believe that the Office of Management and Budget and DOL are taking into account the political winds and other considerations before making a final decision.  Once published, however, the DOL can set the effective dates as early as 60 days which would give employers a very difficult compliance burden.

To recap, under existing regulations, workers may be exempt from overtime if they qualify for one of any “white-collar” exemptions (administrative, executive, or professional).  Those exemptions generally apply so long as an employee is paid on a salary basis at a minimum of $455 per week (or $23,660 a year) and is primarily engaged in certain duties.  The DOL’s proposal seeks to set the initial, salary requirement for the white-collar exemptions at a point equal to the 40th percentile of earnings for full-time salaried workers.  Relying on the most recent data available, the DOL projects that the 40th percentile weekly wage for 2016 will be $970 per week, or $50,440 per year for a full-time worker—an amount that even exceeds California’s aggressive requirement of $41,600 for analogous exemptions.  On a related note, the salary requirement for the highly compensated employee exemption, which will be pegged to the 90th percentile of weekly earnings, will also grow to $122,148.

To ensure that salary levels for exempt employees remain current, the DOL’s proposal seeks to automatically update the salary thresholds annually, using either a fixed percentile of wages or the consumer price index for urban consumers.

The requirements for the “duties test” may also undergo significant changes.  While the DOL did not specify a particular proposal, it asked five questions and sought comment on whether it should change the test and what change should occur.  One question related to the adoption of the California model in which employees must spend more than 50 percent of their time performing exempt duties to be classified as exempt.

The present regulatory black box makes it difficult to predict the content of the final rule and whether the DOL will take into account employers’ concerns.   Employer comments to the rules generally acknowledge that some increase in the salary test needed to occur.  However, most employer commenters believe that the significant increase to more than double the current level will be challenging economically and fails to take into account geographic differences.  Employers criticized the lack of specific proposal to change the duties test and roundly indicated that any change to the California duties test would subject them to uncertainty and additional litigation.

In our view, the DOL may take into account the employer comments and perhaps soften the proposal.  A smaller increase of the salary test to perhaps the low-$40,000 range would allow the DOL to claim that it took employers’ comments into account while at the same time updating the salary test.  As for the indexing component, the DOL may decide to drop this feature.  This proposal is perhaps the most vulnerable to a successful legal challenge as it would represent a reversal of the Department’s statement during the 2004 rule changes when it concluded that it did not have the legal authority to index changes to the salary level.  A court reviewing this change in position in an Administrative Procedures Act challenge could be skeptical of this reversal.  The duties test change is particularly difficult to predict mainly because the OMB, DOL, and White House may not have settled on the final answer.  Looking to recent DOL action, its final fiduciary rule is widely seen as pulling back on some of the radical changes in the proposal.  Likewise, the Department may scale back attempts to change the duties test in a manner as radical as California and perhaps come up with a middle ground proposal.  On the other hand, mimicking the test in the country’s most populous state would allow the DOL to claim that compliance would not be difficult for large employers.

These forthcoming and possible changes may require a radical shift in the operations of many companies, especially those that heavily rely on exempt, professional workers.   Employers may respond by:

  • Converting exempt employees to hourly workers and restricting overtime;
  • Reducing the weekly schedule of nonexempt employees to avoid overtime;
  • Lowering hourly rates of pay; and/or
  • Reducing additional benefits to cover the increased administrative overhead of timekeeping for hour employees.

As a result, employees may not enjoy an increase in overall compensation.

In any case, employers are encouraged to evaluate the status of their exempt employees.  With the rules coming perhaps as soon as this month, and an expected short implementing period to follow, employers should be on guard for significant challenges.