On June 30, 2015, the Department of Labor (DOL) released its anticipated notice of proposed rulemaking which, if enacted, would update the Fair Labor Standards Act’s (FLSA) overtime exemptions, impacting millions of workers. Employers have been expecting these proposed changes since President Obama’s March 2014 Presidential Memorandum directing the DOL to update the regulations defining which “white collar” workers are protected by the FLSA’s minimum wage and overtime standards.
The familiar so-called white collar exemptions for executive, administrative, professional, outside sales or computer employees require workers to satisfy certain job duties tests and receive a minimum weekly salary. The salary level threshold, last updated by the DOL over 10 years ago, is currently $455 per week (or $23,660 per year). The DOL recognizes the salary level test as “the best single test” of exempt status. However, it believes the salary level test’s effectiveness in determining exempt status diminishes as the wages of employees entitled to overtime increase and the real value of the salary threshold falls. As a result, the DOL has proposed increasing the threshold equal to the 40th percentile of earnings for full-time salaried workers. The DOL projects that the salary threshold in the final rule will be $970 per week (or $50,440 per year) for 2016 – more than double the current threshold. The proposed rule also increases the total annual compensation requirement for exempting highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers, or from $100,000 to $122,148 annually. In addition, the DOL has proposed implementing a mechanism to automatically update the salary threshold and HCE compensation requirements annually to prevent them from becoming outdated. At this time, the DOL has not proposed changes to the white collar exemptions’ job duties tests.
The DOL has invited interested parties to submit written comments regarding the proposed rule on or before September 4, 2015. After this comment period, the proposed rule could be amended before any final rule is implemented later this year, or abandoned altogether.
If the proposed rule is implemented as currently drafted, it will have a significant impact on most employers. Workers who are currently classified as exempt because they meet the job duties test and earn more than $455 per week will have to be reclassified as non-exempt if they earn less than $970 per week. As non-exempt, a worker is entitled to overtime pay for hours worked in excess of 40 hours in a workweek. The DOL estimates that 4.6 million workers currently classified as exempt would become entitled to overtime under its proposed rule changes.
The proposed rule, if enacted, will likely cause a tidal wave of mandatory reclassifications for employers. However, there is a silver lining to this potentially black cloud. In addition to those workers who must be reclassified if the proposed rule is enacted, this significant change in the law may provide the impetus for employers to examine other workers whose exempt classification is not affected by the new salary basis changes, but who are still vulnerable to misclassification under the job duties tests to determine whether they should be reclassified. Employers should consider taking this opportunity to review their workforce classifications and evaluate any potential vulnerability for misclassifications in preparation for these potential changes.