Yesterday, the U.S. Department of Labor issued a set of proposed regulations that, if they become law, will dramatically alter the way that many employers are required to compensate their employees. Under the proposed regulations, employers would have to greatly increase the pay of lower paid exempt employees in order for them to continue to be treated as exempt.

Currently, in order to treat a salaried employee as exempt, an employer must, among other things, pay a salary of not less than $455 per week, or $23,660 per year. Under the proposed regulations, employers would be required to pay an employee a minimum of $970 per week, or $50,440 per year, in order to even consider treating them as overtime exempt. The proposed new threshold also would increase annually so that it remains at the 40th percentile of full time salaried employees.

The proposed regulations seem to have been written specifically to benefit low level managers or managers in the retail and food industries by converting about 6 million employees from exempt to non-exempt. Having more employees eligible for overtime pay, the DOL claims, will raise the income for these workers.  

The DOL’s view may be overly optimistic. To be sure, the changes will be dramatic, but they do not mean that these employees will earn more money or even work less. It will depend on the employer and how it reacts to these proposed regulations (assuming they go into effect). 

For instance, an exempt employee currently paid a salary below the proposed new threshold, but who only occasionally works more than 40 hours per week, may simply be told to not work more than 40 hours in a week. The employee never will receive overtime (because it never is worked), and the stability provided to the employee of a guaranteed weekly salary would be lost. 

If, on the other hand, the employee regularly works more than 40 hours per week, the employer has a few options if it wishes to avoid a spike in its payroll obligations. For instance, if the current salary is close to the new proposed threshold, the employer could raise the salary to meet the new threshold and not change the employee's schedule. If the employee regularly works more than 40 hours per week, on the other hand, the employer instead could recalculate the salary so that the new hourly wage plus overtime will equal the current weekly pay total. Under this scenario, the employee only will get paid more if the he or she works more than the current regularly scheduled hours, but the employee may also lose pay if they work less than the current typical schedule.

Under the proposed regulations, therefore, some employees may get more pay, but others will not. Further, while some employees may work fewer hours, working fewer hours may result in them being paid less each week. As employers revise their compensation structures to lessen the burden of overtime, such as by converting some salaried employees to hourly, those employees may lose the status they enjoy as being exempt, as well as some bonus opportunities and other benefits. It's therefore far from clear that these changes are desired by many of the 6 million impacted.

The proposed regulations will go through a comment period, though the timing of that comment period has not yet been set. It is anticipated that it will close by sometime around the end of August or September. If it follows this schedule, the final regulations could be rolled out around the end of the year, and made effective three to six months thereafter. Given the many “false starts” on publishing the proposed regulations, though, such a schedule may be unduly optimistic. 

Through the comments, the Department is seeking feedback on the annual proposed annual adjustment concept, in particular to see if using the CPI would be more appropriate. The Department is also seeking feedback as to whether under the new rule employers should be able to factor in nondiscretionary bonuses, such as productivity or profit sharing bonuses, into the amount used for meeting the higher salary threshold. 

Surprising to many who have been watching this issue, the proposed regulations did not propose a change to the duties tests for the white collar exemptions. Many believed that the DOL would also changes these tests to reach beyond the 6 million and require that exempt employees not perform more than a certain amount of non-exempt duties in order to hold an exempt status. That said, the DOL may be hinting that the final version of the new regulations may do precisely that. The DOL explained that it has been contemplating resurrecting the 20 percent maximum (40 percent for retail employees) which used to be in the old “long test” under the regulations in effect prior to the changes made in 2004. On this point, the DOL is also asking for comments as to making such a change, as well. This is causing considerable angst to employers since, if the regulations go in this direction, it will be doing so without an adequate review or debate by the public.

Employers with concerns regarding these proposals should let the Department know their concerns, in an attempt to modify this proposal before it becomes law.