In response to a request from President Obama, the Department of Labor (DOL) published a proposed change to the “white collar” exemptions to the overtime requirement of the Fair Standards Act (FLSA). The proposed change – which radically increases the minimum salary requirement to qualify for the exemptions – has generated a tremendous number of comments for the DOL to consider. The final version from the DOL is expected to be released early in the summer of 2016.

Background

To be exempt from the time and one-half requirement of the FLSA with respect to executive (supervisory/managerial), administrative, and professional employees, employers must meet two tests.

First is the “duties” test, which the current regulations specify with regard to each of the three “white collar” exemptions. Presently, the employer must demonstrate that the subject employee’s “primary duty,” i.e., the most important task which he or she performs, falls within the specified duties regardless of the actual percentage of time the employees spend performing those duties.

In addition to the “duties” test, the subject employee must be paid on a “salaried basis” with the minimum salary being $455 per week or $23,660 a year to qualify for the “white collar” exemptions. In order to meet this test, the employee must receive his or her entire predetermined salary amount in any week in which any work is performed with some limited exceptions.

Proposed Changes

While the DOL’s present proposal does not address specific changes to the “duties” test, it invited comments addressing whether a strict “division of labor” rather than a “primary duty” test should be implemented. Under the “division of labor” test, the focus would be on the percentage of time spent performing exempt versus non-exempt tasks. For example, at a fast food restaurant, the manager who is presently exempt may spend the vast majority of his time performing non-exempt tasks while concurrently managing and being responsible for the operations of the restaurant. Under the present “primary duty” test, since the most important task being performed is the management of the restaurant, the manager will qualify as exempt. However under the “division of labor” scenario, the fact that the manager spends over 50% of his or her work time performing non-exempt tasks will serve to nullify the exemption.

With respect to the increase in the minimum salary needed to qualify for the exemptions, the DOL’s proposal is to raise it to approximately $970 per week or $50,440 per year. If this proposal becomes final, a vast number of employees presently classified as exempt would instantly become non-exempt and therefore be required to receive overtime compensation.

What to Do

In order to assess how the DOL’s proposal would impact your business, the first task is to determine which employees presently classified as exempt are likely to be affected. If the employees have an annual salary under $50,000, you will need to consider how they are to be classified assuming the new exemption regulations are in place.

Initially you should consider how many hours per week the subject employee typically works. If the number is relatively small (for example, between 40 and 45), you should consider re-classifying the employee as non-exempt and compensate the employee accordingly. Note that non-exempt employees can be paid either on an hourly or salaried basis and the option to utilize the “fluctuating workweek” compensation method for non-exempt salaried employees should seriously be considered. Further, it should be noted that a conversion to non-exempt status also includes record-keeping obligations as to the number of hours worked per day.

On the other hand, if the exempt employees typically work many hours in excess of 40 per week, employers should consider the financial impact of raising the employee’s salary in order to meet the minimum dollar requirement for the exemption. It should be remembered that raising exempt employee’s salaries may have a domino effect as to other employees in order to maintain appropriate salary differentials set forth in the employer’s organization. Alternatively, employers may want to consider re-structuring positions in order to reduce the number of overtime hours which certain employees work.

Conclusion

While there will be a period of time after the DOL’s final regulation is released this summer before it is effective, the prudent employer should begin to plan for implementation assuming a worst-case-scenario.