On June 30, 2015, the Department of Labor issued its long-awaited Notice of Proposed Rulemaking, which updates the Fair Labor Standards Act (FLSA) regulations relating to white collar employees. The proposed regulation would provide for overtime pay to most salaried workers earning less than $50,440.
The FLSA provides that employees must be paid a minimum wage and overtime pay at a rate of not less than one and one-half times the employee's regular rate for hours worked over 40 in a workweek. The FLSA also contains an exemption from minimum wage and overtime pay for executive, administrative, professional, outside sales, and certain computer employees (also known as the "white collar" exemptions).
In order to qualify for the exemption, employees must meet certain tests related to their primary duties, and be paid on a salary basis at not less than the specified minimum amount. The current salary level required for exemption is $455 per week, or $23,600 for a full-year. This salary level requirement was last updated in 2004. The 2004 regulations also provided for an exemption for highly compensated employees who were paid an annual amount of at least $100,000.00.
On March 13, 2014, President Obama signed a Presidential Memorandum directing the Department of Labor to propose revisions "to modernize and streamline the existing overtime regulations," 79 FR 18737. The memorandum instructed the Department to update the regulations defining which "white collar" workers are protected by the FLSA's minimum wage and overtime standards. The Department of Labor took the next 15 months drafting the proposed regulations.
On June 29, 2015, in an op-ed in the Huffington Post, President Obama foreshadowed that the proposed regulations would significantly increase the salary level for the white collar exemptions.
Department of Labor's Proposed Regulations
The Department's proposed regulations span 300 pages and can be found at http://www.dol.gov/whd/overtime/NPRM2015/. The new regulations focus on increasing the salary level required for the white collar exemption. This increase, which more than doubles the current salary level, would extend overtime pay to nearly 5 million workers. Specifically, the Department proposes to:
- Set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers ($921 per week, or $47,892 annually). The salary level is proposed to increase to $970 per week in 2016; and
- Increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annual value of the 90th percentile of earnings of full-time salaried workers ($122,148 annually); and
- Establish a mechanism for automatic updates of the salary and compensation levels to ensure that they will continue to provide a useful and effective test for exemption.
According to the Department, this proposed increase in the salary level to the 40th percentile of weekly earnings and increasing the HCE level to the 90th percentile, combined with annual updating, "is the simplest method for securing the effectiveness of the salary level as a bright-line for ensuring that employees entitled to the Act’s overtime provisions are not exempted."
The Department is not making specific proposals to modify the standard duties tests but is seeking comments on whether the tests are working as intended to screen out employees who are not bona fide "white collar" employees. Specifically, the Department recognized that in some instances, the current tests may exempt employees from overtime and minimum wage protections who are performing such a disproportionate amount of nonexempt work that they are not "white collar" employees in any meaningful sense.
The Department's proposed rule has not yet been published in the Federal Register. Once the proposed rule is published in the Federal Register, the public will have 60 days to submit written comments at www.regulations.gov under Rule Identification Number (RIN) 1235-AA11. Once the Department finalizes the proposed rule, it will likely provide a short grace period for compliance. In 2004, the Department gave employers only 120 days to comply with the new rules.
Now is the Time to Audit Exemptions
Whether the proposed regulations are tweaked before becoming final, one thing is clear – employers should start planning now to determine whether they would be impacted by the proposed changes. Also, this is the time to conduct your audit and correct any positions that may be misclassified.