This morning, the Department of Labor’s Wage & Hour Division (WHD) announced its long-awaited proposal to amend the Fair Labor Standards Act (FLSA) Regulations and, in particular, the regulations governing the “white collar” exemption for executive, administrative, and professional employees.  The Notice of Proposed Rulemaking (“NPRM”) is as surprising for what it includes as what it did not.  This comprehensive summary outlines what changes were made in the proposed FLSA regulations, what did not change, what it means for employers, and what employers should do now in response to the DOL’s announcement.

One thing is clear: the WHD’s proposed FLSA regulations will mean higher minimum salaries for exempt employees, even those who are highly compensated.  Everything else in the regulations will stay the same, at least for now.  However, the WHD has asked for comments on a number of topics, including the duties test and the inclusion of non-discretionary bonuses for purposes of the salary basis test.  Because these are proposed rules, nothing changes today, but the impact of these rules will be far reaching.  Employers should start planning now for the impact on their operations and finances, and consider participating in the public comment period with WHD. 

What Changes Are in the Proposed FLSA Regulations

In short: Higher minimum salaries for exempt employees, even those who are highly compensated.

To briefly recap, the FLSA generally requires that employers pay employees overtime—at least straight time plus one-half times their “regular rate” of pay for every hour they work in excess of 40 hours in a particular workweek. 29 U.S.C. § 207(a). The FLSA and its interpretative regulations published by the DOL, however, exempt certain groups of employees from the overtime pay requirements. One such exemption, and by far the most commonly used, relates to employees working in jobs that the FLSA describes as executive, administrative, or professional—the so-called “white collar” exemptions. 29 U.S.C. § 213(a)(1). In order for employees to fall within one of the white collar exemptions, they must perform executive, administrative, or professional duties (the “duties” test) and make a certain weekly salary (described in the NPRM as the “salary level” requirement).  The regulations also exempt “highly compensated” employees who “customarily and regularly” perform one of the exempt duties of an administrative, executive or professional employee, but who do not otherwise meet the duties test. 29 C.F.R. § 541.601.

The feature change in the DOL’s proposed FLSA rules is an increase in the minimum weekly salary to the 40th percentile of weekly earnings for full-time salaried workers, based on Bureau of Labor Statistics (BLS) data.  In 2013, that number would have equaled $921 per week (or just under $48,000 per year).  The DOL projects that the 2016 level will increase to $970 per week, or $50,440 per year.  For highly compensated employees, the threshold would be set to the annualized value of the 90th percentile of earnings for full-time salaried workers, or $122,148 annually. More importantly, for the first time in the FLSA’s history, the salary and compensation levels would be indexed to this BLS data and updated annually, without the need to go through further rulemaking.

In support of the proposed increase to the salary level test, the NPRM reaffirms the DOL’s longstanding position “that the salary level is the ‘best single test’ of exempt status.”  As the NPRM explains in detail (285+ pages of preamble, 9 pages of rules), the Department’s Wage and Hour Division (WHD) historically has set the salary threshold based on “a broad set of data on actual wages paid to salaried employees and then set the salary level at an amount slightly lower than might be indicated by the data.”  The DOL’s frequently asked questions released with the NPRM explains that the DOL believes that the 40th percentile level “represents the most appropriate line of demarcation between exempt and nonexempt employees.”  By raising the threshold significantly, the DOL believes this should adequately distinguish between those workers who may be properly classified as exempt and those who likely are not, without  the need for immediate change to  the duties tests (at least for now).  The DOL invited comments on the proposed salary level and on any alternative salary levels, as well as the methodology for determining the salary levels, that appropriately makes this distinction. 

Not to be lost in the 285+ pages of the preamble is the fact that the DOL is considering whether to also permit non-discretionary bonuses and incentive payments to count toward a portion of the standard salary level test for the white collar exemptions, and if so, how to include such payments as part of the salary level test.  Even if such payments were ultimately considered, the DOL is likely to put a cap on the amount of the salary requirement that could be satisfied through non-discretionary bonuses and incentive pay.  The DOL is seeking comments on the inclusion of such payments, as well as including commissions as part of these payments.  We will provide further updates on this portion of the NPRM in upcoming days on the Wage & Hour Insights Blog.

What Does Not Change in the Proposed FLSA Regulations

In short: Everything else stays the same…for now. 

The new salary levels still do not apply to outside sales employees, and they still exclude other professionals like lawyers, teachers, and doctors.  American Samoa still get a special salary test because minimum wage in that jurisdiction have remained lower than federal minimum wage.  Similarly, the motion picture industry still has its own special salary rules.  

But the key take away is that the WHD did not propose any changes to the duties tests for the white collar exemptions.  Instead, the NPRM explains that the significant salary threshold increase should eliminate a majority of the “continued extensive litigation regarding employees for whom employers assert the [white collar exemptions].”  By the Department’s calcuations, “[a]t the 40th percentile of full-time salaried workers, there will be 10.9 million fewer white collar employees for whom employers could be subject to potential litigation regarding whether they meet the duties test for exemption (4.6 million who would be newly entitled to overtime due to the increase in the salary threshold and 6.3 million who previously failed the duties test and would now also fail the salary level test).”  That being said, the DOL may consider changes to the duties test before issuing the Final Rule and has sought additional information on the duties test.

What the Proposed FLSA Regulations Mean for Employers 

In short: Nothing changes today, but the future impact will be far reaching. 

Keep in mind that these are just proposed regulations.  After publication in the Federal Register (which we expect will occur shortly), the DOL estimates that the Final Rule resulting from the NPRM will not be released until mid-2016, since the DOL plans to “rely on data from the first quarter of 2016” in setting the salary level.

There is no way to sugar coat it: the proposed salary level increase to $50,440 is substantial and employers will need to consider the impact that this proposal will have on their bottom line.  As noted above, the WHD estimates that 10.9 million workers will no longer qualify as exempt based on the new salary level.  Other estimates peg this number at 15 million or more.  The biggest impact, according to the NPRM, will be on educational and health services, with substantial impacts on wholesale/retail trade, professional and business services, and the leisure and hospitality industries.  Because of the differences in standards of living, businesses in the South and in rural areas will feel the salary level increase most acutely.  However, at $50,440, the proposed salary level exceeds even the highest state thresholds in California and New York.  The salary level will also likely wipe out exempt positions offered on a part-time basis, which are still possible at the current $455/week level.

The salary level increase will likely accomplish the DOL’s goal of using that single test of exempt status without a need to change the duties test.  If there is a silver lining for employers, this is it.  Disputes over whether one of the white collar exemptions applies (the duties test) should be far less frequent.

What’s Next for Employers

In short: Start planning now for the future impact on operations and finances, and consider participating in the public comment period with WHD.

When the DOL finalizes the proposed rule next year, it will not likely provide a long grace period for compliance.  In 2004, the DOL gave employers only 120 days to comply with those new rules, and we expect that the DOL will provide the same or shorter period this time around.  Planning now will help avoid abrupt impacts next year.  Employers should work with wage and hour counsel to complete a preliminary assessment of all positions they currently treat as exempt to determine whether they would be impacted by the proposed changes and whether any potential duties test changes could similarly impact things.  Many employers will need to budget for salary increases and/or increased overtime costs for at least part of 2016.

Beginning with the publication in the Federal Register, the public comment period will extend for 60 days, and represent employers’ only opportunity to provide comments on how the salary level increase will impact them.  The DOL is required to review and respond to all issues raised by the comments.  Most importantly during this period, in addition to comments on the salary level proposal, the WHD also seeks comments on the following questions:

  1. What, if any, changes should be made to the duties tests?
  2. Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?
  3. Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model? Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?
  4. Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the Department reconsider our decision to eliminate the long/short duties tests structure?
  5. Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?

WHD also asks whether it should add “examples of additional occupations to provide guidance in administering” the white collar exemptions.  Because the WHD is using questions here, instead of making a specific proposal about the duties test, this public comment period will likely be the only substantive opportunity for employers to comment on any regulatory changes.  The WHD can (and likely will) use the responses to these questions to implement duties test changes in the Final Rule without any further public comment period.

President Obama is expected to discuss the new FLSA regulations and other economic issues during a Thursday afternoon visit to the University of Wisconsin – La Crosse.