After months of anticipation, the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking (NPRM) on June 30, 2015, that would dramatically alter the Fair Labor Standards Act’s (FLSA) overtime exemptions for “white collar” and highly compensated employees. The NPRM is the result of President Obama’s March 13, 2014, directive to the Secretary of Labor to update the existing overtime regulations for exempt executive, administrative and professional employees. The NPRM contains three key provisions:
- The weekly salary level for the “white collar” exemptions would increase from $455 per week to $970 per week ($50,440 annually);
- The total annual compensation required for the highly compensated employee (HCE) exemption would increase from $100,000 to $122,148; and
- Salary and compensation levels required for the “white collar” and HCE exemptions would be automatically updated on a periodic basis.
Although the NPRM does not propose any changes to the “duties” test associated with the exemptions, it invites “comments on whether the current duties tests are working as intended to screen out employees who are not bona fide ‘white collar’ exempt employees.” This has led many observers to speculate that the DOL may propose changes to the duties test in the future.
The Current Exemptions
The FLSA requires that most employees earn at least the federally-mandated minimum wage (currently $7.25/hour), plus time-and-a-half for all hours worked over 40 in a workweek. Currently, a “white collar” employee is exempt from the minimum wage and overtime requirements if: (1) the employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid meets the minimum amount specified by the FLSA regulations; and (3) the employee’s job duties primarily involve either executive, administrative or professional duties as defined by the FLSA regulations. Certain HCEs are also exempt from minimum wage and overtime if they are paid total annual compensation of at least $100,000 and if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative or professional employee.
The DOL’s Proposal
The NPRM would index the new salary level for “white collar” employees at the 40th percentile of weekly earnings for full-time salary workers and index the salary level for HCEs at the 90th percentile. The DOL states it determined that the 40th percentile level “represents the most appropriate line of demarcation between exempt and nonexempt employees.” The NPRM also establishes a mechanism for the DOL to automatically increase the “white collar” and HCE salary levels in the future “to ensure that they will continue to provide a useful and effective test for exemption.” This would allow the DOL to increase the salary level periodically without further rulemaking. The NPRM also invites comments on other issues, including whether to allow nondiscretionary bonuses to satisfy a portion of the salary requirement.
What Comes Next?
Before becoming final, the DOL’s proposed regulations are subject to a 60-day notice and public comment period. After considering comments, the DOL will issue a Final Rule that may or may not differ from the NPRM. A Final Rule is expected in 2016. If the Final Rule includes the salary levels contained in the NPRM, then upon it becoming effective, exempt employees earning less than the increased salary levels would have to be re-classified as nonexempt and would be subject to minimum wage and overtime requirements. The DOL estimates that the proposed higher salary levels would result in 4.6 million employees no longer qualifying as being exempt from minimum wage and overtime.
What To Do
- Inform appropriate personnel of the proposed changes and the increased costs of complying with the new regulations once they become effective.
- Review the salary level of exempt employees and be prepared to increase their salaries to maintain their exempt status or to reclassify them as nonexempt.
- Review and update or implement policies regarding the reporting of hours worked and the authorization required to work overtime.