Executive Summary: Today, in a 295-page report, the U.S. Department of Labor ("DOL") issued its long-awaited proposed amendments to the Fair Labor Standards Act's ("FLSA") "white collar" exemption tests for executive, administrative, and professional employees (located in 29 CFR Part 541). The DOL refrained from amending the duties portion of the tests; however, it did revise the salary basis and salary level tests. If adopted, the DOL estimates that the new regulation will eliminate the exempt status for approximately 21.4 million employees—increasing the financial and regulatory burdens on employers throughout the United States. Despite not amending the duties portion of the white collar exemptions, the DOL discussed in detail the long and short tests, which were eliminated in 2004, and suggested that it may revisit the issue.
The proposed rule more than doubles the annual salary required for an employee to be considered exempt from overtime or minimum wage under the FLSA's white collar exemptions. Historically, the DOL relied on weighted data to determine the salary levels that would serve as the threshold for the exemptions. Doing so minimized the impact on depressed regions and industries. The proposed amendments alter this approach and instead look at BLS data related to the compensation of all American salaried employees—without regard to low-wage regions or low-wage industries. The DOL takes this position even though it considers similar regional and industry factors with respect to the prevailing wage for government contracts.
Currently, the white collar exemptions in 29 CFR Part 541 require employers to pay employees a salary of at least $455 per week ($23,660 annually) and to perform certain exempt duties. The "highly-compensated" exemption currently requires employers to pay a salary of over $100,000 annually. The proposed amendments increase the salary basis test from $455/week to $970/week ($50,440 annually) beginning in 2016. This new salary represents the 40th percentile of earnings for all full-time salaried workers throughout the United States. Similarly, the "highly-compensated" exemption under the FLSA has been increased from $100,000 to $125,148 annually, which is tied to the 90th salary percentile. Unlike the 2004 regulations, these amounts are not stagnant but will be automatically updated each year to the applicable 40 percent or 90 percent thresholds. This means each year employers may need to modify their payrolls to ensure their employees are properly classified as exempt.
Rather than proposing any changes to the duties portion of the test, the DOL solicited comment in response to specific questions:
- 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 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?
- Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the Department reconsider its 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?
Impact On Employers: The proposed rule will have a disproportionate impact on certain regions and industries for obvious reasons. In addition, the DOL explicitly states that an increased salary basis test "will accomplish the goal of setting a threshold that adequately distinguishes between employees who may meet the duties requirements . . . and those who likely do not, without necessitating a return to the more detailed long duties test." Through this statement, the DOL is implicitly asserts that if employers do not agree with the 40 percent standard, the DOL may revert to a lower percentage standard in exchange for a higher duties requirement—which was known as the long test that was eliminated in 2004. In other words, employers may have to return to the production dichotomy analysis, which is currently used in California, requiring employers to determine what percentage of work performed each workweek consists of exempt versus nonexempt duties.
The immediate result will be that employers in every state will be required to review the exempt status of their employees. The proposed salary basis test is greater even than that of California's, which is currently the highest at $37,440. Employers should also expect that states like California will soon after increase the threshold salary basis required under state law.
Employers' Bottom Line: The DOL's proposed rule focused on increasing the salary basis for the FLSA's white collar exemptions, with which both employers and employees are—for the most part—in agreement. The proposed increase was not weighted as it had been in the past, which will elicit objections from employers, particularly within the retail and restaurant industries. In response, the DOL will likely include a two-tiered system in the final rule whereby employers will be left to choose between these drastically increased salary thresholds or lower salary thresholds with more stringent duties requirements (i.e., in particular a return to the production dichotomy). Both scenarios will result in a substantial increase in nonexempt workers in targeted industries and regions.
The proposed rule was reviewed by the OMB but has not yet been published in the federal register. Once published, employers should consider submitting electronic comments. A Guide to the Rulemaking Process is available at:https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf (last visited June 20, 2015).