The proposal seeks to significantly increase the salary level needed to qualify as exempt under the FLSA’s white collar standard and highly compensated exemptions.

On June 30, the US Department of Labor (DOL) announced the highly anticipated proposed revisions to the Fair Labor Standards Act’s (FLSA’s) overtime exemptions. The proposed revisions increase the minimum salary needed to qualify for the FLSA’s standard white collar exemptions to be equal to the 40th percentile of weekly earnings for full-time salaried employees (projected to be $50,440 annually or $970 a week in 2016). The DOL also proposes to increase the minimum total annual compensation required to qualify for the highly compensated exemption to be equal to the 90th percentile of earnings for full-time salaried employees ($122,148 per year as of 2013). Additionally, the DOL proposes to adjust (and likely increase) these minimum salary and compensation levels on an annual basis. The proposed rule does not include changes to the FLSA’s duties test , but the DOL nevertheless seeks comments on whether, in light of its compensation proposals, changes to the duties test are necessary.

The DOL is providing the public with a 60-day period after the proposed rule is published in Federal Register to comment on it. The DOL estimates that 4.6 million workers who are now classified as exempt under the current regulations will become overtime-eligible under the proposed regulations without some intervening action by their employers.

On July 7 at 12 p.m. eastern time, Morgan Lewis will host a one-hour webinar to discuss the proposed regulations and to address what employers should do in light of the proposed changes, including consideration of compensation plan options and a communications strategy in the event of a reclassification. Register for the webinar.

Background

The FLSA’s white collar exemptions exclude certain executive, administrative, and professional employees from federal minimum wage and overtime requirements. Presently, to qualify for one of these exemptions, employees generally must (1) be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”); (2) be paid more than a specified salary threshold, currently $455 per week or $23,660 annually (the “salary level test”); and (3) primarily perform executive, administrative, or professional duties as provided in the DOL’s regulations (the “duties test”).[1]

Additionally, certain highly compensated employees are exempt from the FLSA’s overtime pay requirements if they are paid total annual compensation of at least $100,000, receive at least $455 per week paid on a salary or fee basis, perform office or nonmanual work, and customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.[2]

The FLSA regulations were last updated in 2004. In March 2014, US President Barack Obama directed US Secretary of Labor Thomas E. Perez to “modernize and streamline” the DOL’s white collar exemption regulations. In issuing the proposed regulations, the DOL “seeks to update the salary level required for exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of nonexempt employees, thus making the executive, administrative and professional exemption easier for employers and workers to understand and apply.”[3]

The Proposed Rule

The DOL’s proposed rulemaking sets forth three key proposed changes to the current FLSA regulations:

  • A new minimum salary level to qualify for the white collar exemption standard salary-level test, which is set at the 40th percentile of weekly earning for full-time salaried workers. In 2013, this amount was $921 per week, or $47,892 annually. The DOL projects that in 2016, when the rule will likely take effect, the 40th percentile will be about $970 per week, or $50,440 annually.
  • A new minimum total annual compensation requirement to qualify for the highly compensated exemption set at the 90th percentile of weekly earnings for full-time salaried workers. In 2013, this was $122,148 annually. The DOL does not propose what the amount will be in 2016.
  • A newly established mechanism for annually updating the minimum salary and compensation levels for these exemptions going forward.

DOL Requests for Comment

The DOL also seeks comments on a variety of issues throughout the proposal. For example, the DOL is specifically seeking comments from the public on whether to allow incentive compensation and nondiscretionary bonuses, such as a production bonus, to be considered in determining whether the salary-level test is satisfied. The DOL noted that although it is considering such a change from the current requirements that do not permit such credits, it likely will cap the amount of incentive pay and nondiscretionary income that could be considered and is currently considering capping at 10% of the standard weekly salary level. The DOL also noted that in order for employers to be permitted to credit such compensation toward the weekly salary requirement, it envisions requiring employees to receive the bonus payments monthly or more frequently. The DOL also expressly requested comments on whether commissions should be included as part of nondiscretionary bonuses and other incentive payments that could partially satisfy the standard salary-level test. In its discussion of this potential change, the DOL makes clear that it is not considering adding discretionary income, board, food, lodging, or benefit payments as a credit in satisfying the salary-level requirements.

The DOL is also seeking comments regarding the methodology it should use in annually updating the minimum salary and compensation levels going forward. The DOL has proposed two possible methodologies for consideration. The first proposal is to keep the required levels pegged to the 40th and 90th percentiles of earnings for full-time salaried workers. The second proposal would adjust the minimum salary and compensation amounts based on changes in inflation as measured by the Consumer Price Index for All Urban Consumers. Regardless of the methodology used, the DOL states that it will publish a notice with the new salary level in the Federal Register, as well as on the Wage and Hour Division’s website, at least 60 days before the updated rates would become effective. The DOL specifically seeks comment on how frequently updates to the level should be made as opposed to the annual approach it is considering, as well as when such changes should be made (e.g,, on January 1 of each year or on the anniversary of the final rule’s effective date).

No changes in the duties test are included in the proposed rulemaking. Nonetheless, the DOL is seeking comments on whether the current duties test is working to effectively screen out employees who are not bona fide white collar exempt employees. Specifically, the DOL is soliciting comments on what, if any, changes should be made to the duties test; whether employees should be required to spend a minimum amount of time performing work that is their primary duty in or to quality for an exemption (i.e., a requirement similar to California’s 50% requirement for exempt employees); whether the DOL should reinstitute the long/short duties test used prior to the 2004 revisions to the regulations; whether additional examples of how the exemption may apply to specific jobs should be included in the regulations; whether the concurrent duties regulation for executive employees should be changed; and suggestions regarding further examples of the application of white collar exemptions to employees in computer-related fields.

Comment Deadline and Timing Implications

The 295-page proposal was posted on the DOL’s website on June 30, but it has not yet been published in the Federal Register, which triggers the start of the comment period. We expect it to be published in the next few days. Comments are due 60 days after publication, which means that the deadline for submitting comments will likely be in early September, unless an extension to the comment period is granted. At this point, it is unclear when the final regulations will be published, but we do not expect them to be issued before 2016. The effective date of the new regulations likely will occur at least 30–60 days after the final regulations are published.

Additional Guidance

In addition to issuing the proposed rulemaking, the DOL issued a factsheet[4] and answers to frequently asked questions[5] regarding its proposed revisions.

Conclusion

The proposed revisions to the FLSA’s white collar exemptions are designed to extend overtime protections to millions of employees. Employers should consider the following actions.

First, companies and trade associations affected by the proposal and possible changes to the duties tests should consider submitting comments to ensure that the regulatory record reflects the true impact of any proposed changes and to shape the final rule.

Second, the significant increase in the compensation required to meet the proposed salary-level test will likely affect long-standing staffing and compensation models. Additionally, the publicity generated by the proposed changes may cause a number of employees to question whether they are properly classified. As such, although any final regulatory change is not imminent, we recommend that companies consider auditing their current employee population to determine what changes will be made to staffing models and the classification of “close to the line” positions if and when the proposed rule becomes final. Those changes may include raising the salary for certain employees to meet the new proposed standards, bolstering job duties, or reclassifying employees from exempt to nonexempt. Reclassifying exempt employees to nonexempt, in turn, requires considering a broad range of issues, including communication strategy, manager and employee training, timekeeping policies and practices, scheduling, compensation structures, calculation of the overtime rate, and many other issues. Planning ahead is critical to managing the risks associated with reclassification.