On Tuesday, June 30, 2015 the U.S. Department of Labor ("DOL") issued proposed regulations which, if adopted, will significantly change employers' obligations under the Fair Labor Standards Act ("FLSA") and could make more than five million additional employees eligible for overtime compensation. The DOL's proposed changes come in direct response to President Obama's request that the DOL simplify the overtime regulations and make overtime available to more employees. At a minimum, the proposed regulations could result in overtime pay for many more lower-level managers.

Background

Under the FLSA, an employee must be paid overtime at a rate of one and one-half times his/her regular rate of pay unless the employee falls under one or more of the express exemptions to this overtime requirement. For example, employees can be exempt from the overtime requirement under the administrative, executive, professional and/or computer professional exemptions. Under the current version of the regulations, an employee is exempt from the overtime provisions under one of these exemptions only if the employee receives a weekly salary of at least $455 per week and satisfies other tests relating to the "duties" and responsibilities of the employee's position. The duties tests were significantly modified by the DOL in 2004. For now, the proposed regulations seek to modify only the salary requirement of the various exemptions.

Proposal Summary

The proposed rules would increase the salary threshold from $455 a week (or $23,660 per year) to $970 a week (or $50,440 per year) in 2016. The DOL's proposed minimum exempt salary threshold represents the fortieth percentile of full-time salaried employees’ salaries and would include automatic periodic increases. Additionally, highly compensated employees who, under the current FLSA regulations, are exempt if they receive more than $100,000 per year (and meet a lowered duties standard), and would see the salary threshold rise to $122,148. The new proposed "highly compensated" salary threshold represents the ninetieth percentile of all full-time salaried workers.

While the proposed rules do not expressly seek to revise the various duties tests necessary to be considered exempt, the DOL has made it clear that this issue is squarely on its radar. In its Notice of Proposed Rulemaking, the DOL expressed concern that many employees who are classified as exempt are actually performing a disproportionate amount of non-exempt work. Accordingly, the DOL has also sought comment on: 1) whether changes should be made to the duties tests in general; 2) whether the tests should include a requirement that a minimum percentage of exempt work be performed; 3) whether DOL should adopt California's 50 percent exempt work threshold; 4) whether the DOL should reincarnate the "short-" and "long-form" tests; and 5) whether DOL should revise the "concurrent duties test," which can permit lower-level managers to be exempt even though they spend more than 50 percent of their time on non-exempt duties (e.g., non-managerial tasks engaged in by subordinates). Because the DOL laid the groundwork for changes in its Notice, it is possible that the Final Rule will revise the duties tests as well, which would undoubtedly result in a firestorm of litigation challenging the legitimacy of the regulations and the process for revising them.

Next Steps

While the proposed rules would not go into effect until 2016, employers should, with the help of counsel, analyze their exempt population and identify the positions that would not meet the proposed increased salary threshold. Employers should also analyze the amount of time that exempt employees are spending on exempt and non-exempt work, as the Final Rule could very well include changes to the duties tests. In particular, employers should identify lower to mid-level managers who spend more than 50 percent of their time on non-exempt work. Based on this analysis, employers should consider whether (in the event the regulations are adopted) to reclassify the positions that do not meet the proposed salary threshold or to increase pay levels. Employers should also consider other options such as hiring more staff to spread out hours and limiting employees to working 40 hours or less.

During any review, employers must also be cognizant of state laws, some of which already include a higher salary threshold and more rigorous duties requirements. For example, to be exempt in California, an employee must receive an annual salary of at least $37,440 and spend more than 50 percent of his/her time on "exempt" duties. In fact, California employees must receive an annual salary of at least $84,130.53 to be exempt under the state's "computer professional" exemption.