In what will prove to be both an historic milestone in wage and hour law and a compliance juggernaut, the Wage and Hour Division of the U.S. Department of Labor issued the long-anticipated proposed amendments to the Part 541 white collar exemption regulations this morningi. In answering the directive to “update regulations regarding who qualifies for overtime” issued by President Obama’s March 13, 2014 Memorandum, The Wage and Hour Division took dead aim only at the salary basis, setting the salary level to qualify for exemption from the FLSA minimum wage and overtime requirements as an executive, administrative or professional employee at the 40th percentile of full-time salaried workers and at the 90th percentile for the highly compensated employee exemption, choosing not to dismantle the job duty requirements applicable to the exemptions. In 2013, the 40th percentile of full-time salaried workers was $921 per week or $47,892 annually, and the 90th percentile was $122,148 annually. The DOL projects, based on the latest data for the first quarter of 2015 (with the 40th percentile at $951 or $49,452 a year) and assuming a two percent growth between the first quarter of 2015 and the first quarter of 2016, that the 40th percentile weekly wage in the final rule will likely be $970 or $50,440 for a full-year worker.

The President perceived a problem with the nation’s overtime rules, stating, “[w]orkers who are paid hourly wages or who earn below a certain salary are generally protected by overtime regulations, while those above the threshold who perform executive, professional or administrative duties are not. That threshold has failed to keep up with inflation, only being updated twice in the last 40 years and leaving millions of low-paid, salaried workers without these basic protections.” Further, the salary basis has only been changed twice – in 1975 ($250 per week) and 2004 ($455 per week)ii Following the President’s comments, speculation ensued as to the extent of the increase, with certain political factions advocating for increases as high as a $69,000 annual salary. As such, the steep hike in salary basis is not unexpected. Significantly, however, the DOL’s proposal discusses the potential inclusion of nondiscretionary bonuses in the salary basis for executive, administrative, and professional employees, but does not propose specific regulatory changes, instead soliciting comments about whether such payments should be credited toward the weekly salary requirement, and whether 10 percent is the appropriate limit on the amount of the salary requirement that can be satisfied by nondiscretionary bonuses and incentive payments. The DOL is also seeking comment on the appropriateness of including commissions as part of nondiscretionary bonuses and other incentive payments that could partially satisfy the standard salary level test. Further, the DOL is not simply using the 40th percentile benchmark to ascertain a number for inclusion in the final regulations; rather that is a potential benchmark to be used on an annual basis going forward. The DOL is proposing to automatically update the salary basis annually and is seeking comment on whether to take a “fixed percentile” approach or to make changes based on the CPI-U (a commonly used economic indicator for measuring inflation) and when such annual updates should be scheduled (the effective date of the Final Rule, January 1, or some other specified date).

By simply raising the salary level required to meet the exemptions, the Administration has immediately moved the non-exempt line on companies’ organizational charts up a number of boxes. Indeed, the DOL has estimated that increasing the standard salary level from $455 per week to the 40th earnings percentile for all full-time salaried workers will directly affect 4.6 million workers, and that the direct employer costs of increasing salary basis as proposed will total $592.7 million in the first year, with average annualized direct costs of $194.2 million per year over 10 years. The industries anticipated to be most heavily impacted are education and health services, professional and business services, financial activities, and wholesale and retail trade.

In short, the impact to employers if the proposed regulations become a final rule will be tremendous. Employers should take proactive steps now to identify positions in their organization that will be affected by the salary basis hike and to train managers who may be tasked with managing nonexempt employees for the first time about best practices in tracking time worked for overtime purposes. Finally, to the extent that employers may consider organizational changes that include adding more employees, this could affect coverage under the FMLA, the Affordable Care Act and potentially various state and local laws where coverage is tied to the number of employees. A more detailed analysis of the proposed regulations will be forthcoming and Dinsmore will be tracking developments during the notice and comment period. Please feel free to contact your Dinsmore attorney to discuss this substantial development.