Yesterday, the Wage and Hour Division of the Department of Labor used its rulemaking authority to propose changes to existing overtime regulations that President Obama announced would make “up to five million more people eligible for overtime.” The proposed rule would amend the existing regulations governing the white-collar exemptions under the Fair Labor Standards Act (FLSA) and raise the required salary threshold for exemption from overtime from $23,660 per year ($455 per week) to $50,440 per year ($970 per week) by next year.
Going forward, the proposed rule would also tie the minimum salary threshold to the 40th percentile of earnings for full-time salaried workers, as reported by the Bureau of Labor Standards (BLS). Accordingly, if the proposed rule is finalized, the minimum salary threshold for exempt workers would be adjusted upward annually based on the BLS data. This is the first time the minimum salary threshold has been tied to an adjustable measure.
The proposed rule also increased the minimum salary threshold for the highly compensated employee exemption to the overtime requirements. Previously, an employee earning at least $100,000 in total annual compensation was exempt from overtime as long as they could meet at least one of the duty tests. In other words, highly compensated employees had a much simpler test for overtime exemption. This threshold has also been increased and tied to the BLS data. The Department of Labor’s proposal would set the highly compensated employee annual compensation equal to the 90th percentile of earnings for full-time salaried workers ($122,148), and likewise provide for annual adjustment.
If finalized, the proposed rule would effectively double the minimum salary threshold for all overtime exemptions, which is a significant change in the law. The following FAQ answers some of the most common questions we anticipate will be raised by employers:
Q: Should employers take any immediate action to change their pay practices?
A: This is only a proposal, which is subject to review and comment from the general public. Until the rule is finalized, the law remains unchanged and the previous salary thresholds remain in effect. That said, we fully expect that the final rule will be very close to this proposal and prudent employers may want to take this fact into account when evaluating annual increases and future strategies for employee compensation.
Q: Our organization has an employee who makes less than the proposed threshold of $50,440, what are the options?
A: If you want to continue to lawfully classify an employee as exempt after this proposed rule is finalized, one option would be to increase the employee’s salary to the new minimum salary required by the regulations. Another option would be to convert a formerly exempt employee to an hourly, non-exempt employee, who would then be eligible for overtime.
For example, if the rule was finalized tomorrow, a salaried exempt employee making $30,000 per year, would no longer be eligible for an overtime exemption. The employer could choose to increase the employee’s salary to keep the exemption, or the employer could convert the employee to non-exempt status at whatever hourly rate the employer deems appropriate. Obviously, if the employee is converted to non-exempt, the employee would be entitled to an overtime rate of time and one-half for all hours worked over 40 in a work week.
Q: Will this proposed change to the overtime laws increase the risk of litigation?
A: FLSA litigation is one of the hottest areas of employment law and shows no signs of slowing down. These proposed regulations will, no doubt, result in many employees being transitioned from exempt to non-exempt. This could be beneficial because there will be fewer exempt employees to complain about misclassification.
Although these changes are intended to help employees, some workers may, in the long run, suffer a loss of pay. Some employees may not understand these changes and believe that they are somehow being mistreated or underpaid. That could lead to litigation.
Moreover, some employees who are transitioned from exempt status to non-exempt status may question whether they should have been receiving overtime all along, and whether their previous classification as exempt was lawful. Put simply, we recommend that employers tread carefully in this area, and make every effort to communicate with employees regarding any changes to their pay, so as to avoid any misunderstandings or conflict that could lead to litigation.
Q: Is the Department of Labor considering any other changes to the overtime regulations?
A: Yes. The Department of Labor has invited comments on a number of questions related to the duties tests for the overtime exemptions, but has not yet announced any specific changes. Generally, the DOL is looking at (1) should exempt employees be required to spend a minimum amount of time on exempt work, and, if so, what is an appropriate amount; (2) whether the California rule requiring employees to spend more than 50 percent of their time on exempt work should be followed at the federal level (currently the federal law has no strict percentage test); (3) whether a single test for each exemption category is sufficient; (4) whether exempt employees should be allowed to work concurrently on both exempt and non-exempt tasks without losing the exemption; and (5) whether additional specific job classifications should be added to the regulations as examples of exempt positions.