After months of internal debates and conferences, the U.S. Department of Labor (DOL) released the long-anticipated proposed overtime rule today. If implemented, the proposed rule will significantly expand overtime pay for Americans under the Fair Labor Standards Act (FLSA).
Key things to know about the proposed overtime rule
- Increase in salary requirement for overtime exemption. If implemented, the proposed rule will more than double the minimum salary threshold required to qualify for FLSA “white collar” exemptions, from $23,660 annually to $50,440 annually. The $50,440 salary is a projection that represents the 40th percentile of weekly earnings for full-time salaried workers.
- Increase in salary requirement for highly compensated employees. If implemented, the proposed rule will increase the total annual compensation required for the exemption of highly compensated employees (HCEs) to the 90th percentile of weekly earnings for full-time salaried workers. This would raise the HCE exemption threshold requirement from $100,000 annually to $122,148 annually.
- The salary requirements would automatically update annually. Under the proposed rule, the salary basis requirement for both the white collar overtime exemptions and HCE exemption would automatically update on an annual basis. The standard overtime exemption standard would remain proportionate to the 40th percentile of weekly earnings for full-time salaried workers. Similarly, HCE salary levels would remain proportionate to the 90th
- The DOL is seeking feedback regarding the standard duties test and non-discretionary bonuses. The DOL has not proposed any specific changes to the standard duties test, but it is soliciting suggestions and comments in its discussion of how the test may be amended to screen out employees who do not truly fall into the category of “white collar” exempt employees. In general, comments received from management before the issuance of the proposed rule weighed against modifying the duties test, likely because changing the duties test will create more confusion as opposed to less and because it has the potential to render past court and agency interpretations of the duties test useless. In addition, the DOL has tentatively considered adopting a provision that would permit non-discretionary bonuses to account for 10 percent of the salary basis requirement. However, the DOL is seeking comments from employers about this possibility as well as the appropriateness of considering other incentive compensation and commissions to contribute to the salary threshold. Employers who pay employees on a commission basis may want to strongly consider addressing the DOL’s comment that employees paid on a commission basis may not satisfy the duties test, as this statement is not consistent with the position DOL has taken since the FLSA regulations were last amended in 2004.
- The impact is significant. This will be the first update to FLSA salary levels since 2004 and could result in wage increases for up to 5 million people as early as 2016. Roughly 40 percent of salaried workers, a substantial increase over the current 8 percent, would be eligible for overtime pay under the proposed rule.
- Additional thoughts for employers. Employers should begin preparing for substantial potential reclassifications of their workers. When the regulations were last amended in 2004, the result was a rash of wage-and-hour class-action lawsuits that has only begun to diminish in the past few years. Under the proposed rule, employers would also face a heightened administrative burden of tracking hours worked by the now non-exempt employees. The financial cost for employers collectively across the country will also be substantial. The DOL estimates an average annualized direct cost to the employer community of between $239.6 million and $255.3 million per year, as well as an additional annualized transfer from the employer to the employee in the form of increased wages estimated between $1.18 million and $1.27 million per year.
Employers and other interested parties may wish to strongly consider submitting comments during the 60-day comment period beginning June 30, 2015. Comments should specify that the rule being addressed is “RIN 1235-AA11” and should contain an agency name. Comments can be submitted at the Federal eRulemaking Portal or can be mailed to: Mary Ziegler, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, N.W, Washington, D.C. 20210. Comments received will become a matter of public record and will be posted to the Federal eRulemaking Portal website without change or redaction.