On November 5, 2015, at the American Bar Association’s Ninth Annual Labor and Employment Law Conference (“Conference”), the U.S. Department of Labor’s (“the Department”) Solicitor (i.e., lead litigation attorney), M. Patricia Smith, participated in a panel discussion with attorneys representing employers (Dennis McClelland of Phelps Dunbar and Elizabeth Lawrence of Honeywell International Inc.) and employees (Gregory McGillivary and Laura Ho), to address the Department’s plans to finish revising the Department’s regulations on the “white collar” exemptions to the Fair Labor Standards Act’s (“FLSA”) overtime pay provisions.

The white collar exemptions generally permit employers to pay certain employees on a salary, as opposed to hourly, basis, without having to pay overtime. To take advantage of the exemptions, the employer typically must show that the employee is paid at least a certain threshold salary (“the salary basis test”) and has a primary duty that meets certain requirements set forth in Department regulations (the “duties test”). The duties test is qualitative, in that it evaluates what the most important duty of the employee is, as opposed to relying on a purely numerical threshold.

The Department’s revisions come at the directive of President Obama, who, in March 2014, issued a Presidential Memorandum directing the Department to update the regulations governing the white collar exemptions. Accordingly, this past July, the Department published a proposed Rule in the Federal Register that would change the salary basis test in several ways: (1) by raising the salary basis test (currently $455 per week or $23,660 per year) to $970 per week or $50,440 per year; (2) with respect to highly compensated employees (i.e., those who currently earn at least $100,000 per year, and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee), by increasing the total annual compensation requirement to $122,148); and (3) by providing for annual indexing to raise both the salary and highly compensated employee threshold levels.

Notably, the Department did not propose any specific changes to the duties tests, but rather raised questions of whether it should change this component, including whether it should implement a “quantitative test” that would consider whether an employee spends at least 50% of his or her working duties performing exempt job tasks. In such a case, the employee would be ineligible for overtime pay. Despite not making any specific proposal about the duties test, and threats of litigation to challenge the Rule, the Department believes it has the authority to make such changes in a final version of the Rule based on asking questions in the proposed Rule.

Representing the employer’s view on the panel, Dennis McClelland voiced several concerns with the proposed Rule, including:

  1. Questioning how the Department reached the proposed 40th percentile salary threshold. McClelland explained that the FLSA has no salary requirement in the statute itself and that the salary basis test is a creature of the Department. Since the 1940s, the salary levels were set to screen out obvious non-exempt employees (and not as a means to set pay or expand overtime coverage). McClelland advocated for the use of a lower threshold, since the proposed 40thpercentile threshold fails to recognize regional differences in wages.
  2. Pointing out that some commenters had warned that the proposed salary indexing could raise the salary threshold to approximately $75,000 per year by the end of 2017. Commentators have explained that, once employers reclassify employees and convert them to hourly employees, an index using the 40th percentile of all salary earners could cause disproportionate increases in the salary level each year. This substantial increase from indexing will cause more and more employees with clearly exempt job duties to fail the exemption test.
  3. Suggesting that the change from exempt to non-exempt status may have a negative impact on employee flexibility and morale. McClelland gave the example of exempt employees, formerly used to workday flexibility in attending family and school functions and events, losing such flexibility with a change to non-exempt status, since they would have to clock in and out on a time clock and record their time.
  4. Advocating for the inclusion of non-discretionary bonuses in pay calculations for the salary basis test, since in the modern economy employee base wages frequently do not reflect actual employee compensation.

McClelland also discussed employers’ potential responses to the Rule if finalized as proposed, and suggested that employers would have several options: (1) to increase exempt employees’ wages to meet the new salary threshold; (2) to convert exempt employees to non-exempt employees, which would lead to further burdens on employers, such as determining how to set hourly rates for former salaried employees; (3) to analyze whether employees come within other FLSA exemptions; and (4) to consider the use of alternative compensation systems, such as the fluctuating workweek method or a fixed lump-sum payment system. Other comments were raised regarding potential responses to the Rule, such as a potential increase in claims by newly non-exempt employees seeking back pay for previously uncompensated shift work prior to their change in status.

With the foregoing insight from the panel discussions in mind, employers should continue to monitor the Department’s actions on the proposed Rule and stay tuned for the Department’s promulgation of the final Rule.