The U.S. Department of Labor (DOL) finally published the long-awaited proposals to amend the "white collar" exemptions for executive, administrative, professional, and highly compensated exempt employees. The DOL's proposed changes seek to significantly increase the minimum salary an employee must earn to qualify for a white collar exemption, or for the highly compensated employee exemption. The proposed overtime rules may also make changes to the exempt duties tests as well. What those potential changes are, however, remain unclear.
Over a year ago President Obama announced his intention to modify the overtime regulations, which were last updated in 2004. In March 2014, President Obama directed Labor Secretary Thomas Perez to “modernize and streamline” the regulations. Through the proposed regulations, the DOL “seeks to update the salary level required for exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of nonexempt employees, thus making the executive, administrative and professional exemption easier for employers and workers to understand and apply.” According to the DOL, once effective, the new overtime rules would immediately make nearly 5 million additional workers eligible for overtime in the U.S. Others estimate the proposal would impact more than 10 million workers.
Key Provisions of the Proposal
The DOL’s proposed amendments contain three key changes to the current FLSA regulations:
- Set the minimum salary required to qualify for the white collar exemptions (the administrative, executive, and professional exemptions) at the 40th percentile of weekly earnings for full-time salaried workers. Based on 2013 data, this would amount to a minimum salary of $921 per week or $47,892 annually. The DOL projects that in 2016, when the rule will likely take effect, the 40th percentile will be about $970 per week, or $50,440 annually. This increase, if approved, would almost double the current salary basis -- which is at least $455 per week or $23,660 annually.
- Increase the total annual compensation requirement needed to exempt highly compensated employees to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers. In 2013, this was $122,148 annually. This too is a large increase over the current salary basis of at least $100,000 annually. The DOL did not forecast what the amount might be in 2016.
- Establish a mechanism for automatically updating the minimum salary and compensation levels for these exemptions going forward.
Surprisingly, the proposal does not contain any specific changes to these exempt classifications' duties requirements "at this time." Instead, the DOL only "seek[s] to determine whether, in light of our salary level proposal, changes to the duties tests are also warranted" and "invites comments on whether adjustments to the duties tests are necessary, particularly in light of the proposed change in the salary level test."
The DOL asks for comments on the following issues:
- What, if any, changes should be made to the duties tests?
- 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?
- Should the Department look to the State of California’s law (requiring that 50% 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% of an employee’s time worked a better indicator of the realities of the workplace today?
- 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?
- 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?
The DOL also seeks comments on a variety of other issues throughout the proposal.
Comment Period & Final Publication
The proposed regulations are subject to a public comment period. Employers, trade groups, unions, and other interested parties now have 60 days − or until September 4, 2015 − to provide their comments on the 295-page proposal. After the public comment period, the DOL will draft a final regulation that may differ from the text of the current proposal. The Office of Management and Budget will then review the draft regulations before they are published in final form in the Federal Register and take effect. The final regulations are not expected to go into effect before 2016.
Actions for Employers
The proposed new overtime rules are designed to extend the FLSA's overtime protections to millions of workers and, if adopted, will have a significant impact on employers' operations. As a result, employers should consider the following actions:
- Identify the employee populations in your workforce currently classified as exempt under the white collar exemptions who will not meet the DOL’s proposed increases in the salary basis tests, if and when the proposed rule becomes final.
- Create an action plan to be ready to raise the salary for certain employees to meet the proposed minimum salary threshold, or reclassify employees from exempt to non-exempt.
- If employees are reclassified from exempt to non-exempt, determine an appropriate hourly rate, work schedule, and timekeeping policy and practice for those employees, including an appropriate communication and training strategy and budgeting for salary increases and increased overtime costs.
- Consider submitting comments to the DOL during the 60-day public comment period to ensure that the DOL understands the true impact of any changes to the current regulations.