The U.S. Department of Labor (DOL) issued its long-awaited proposed rule that would change the federal regulations of the Fair Labor Standards Act’s (FLSA) overtime provisions in a June 30, 2015 Notice of Proposed Rulemaking (NPRM), and the firestorm of praise and criticism has begun.
While the final rule is months away, controversy started long before the NPRM was issued this week. In fact, President Obama’s March 2014 memorandum to the Secretary of Labor, “Updating and Modernizing Overtime Regulations,” started this process. That memorandum directed the Secretary to:
- consider how the regulations could be revised to update existing protections consistent with the intent of the FLSA;
- address the changing nature of the workplace; and
- simplify the regulations to make them easier for both workers and businesses to understand and apply.
The NPRM, entitled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” is nearly 300 pages long (the table of contents is two full pages in length), and includes a legislative and regulatory history of the FLSA, an overview of the existing overtime regulations and requirements, and numerous exhibits and appendices. That fact, in itself, seems to indicate that the NPRM may have missed the mark of President Obama’s third point.
The Current Regulations
The FLSA provides basic rights and wage protections for U.S. workers, including both federal minimum wage and overtime requirements. Most workers covered under the FLSA must receive overtime pay of at least 1.5 times their hourly rate for hours worked in excess of 40 per week, unless otherwise exempted.
Under the current regulations, to qualify for that exemption, an employee must be earning $455 per week (which amount to $23,660 per year). In other words, unless an individual earns at least $455 per week, he or she is not exempt from the overtime provisions of the FLSA.
In addition to this salary threshold, to be exempt from the overtime regulations, the employee must also hold a position that falls within specific classifications of so-called “white collar” jobs, namely executive, administrative, and professional positions. To fall within a white collar exemption, an employee must meet the “duties test” for one of the white collar categories.
Highly compensated employees (HCEs) may also be exempt from overtime payments if they: (1) earn over $100,000 per year (which may include commission payments, nondiscretionary bonuses, and other nondiscretionary compensation); and (2) earn at least $455 per week in salary or fees, and “customarily and regularly” perform the duties of one of the white collar positions listed in the FLSA.
The Proposed Rule
The proposed updates to the regulations focus primarily on the salary thresholds currently in place for white collar workers to be considered exempt and propose the following:
- resetting the standard salary level from $455 per week to $921 per week, which equates to a yearly salary of $47,892 (although by the time the rule is final, the numbers are likely to be closer to $970 per week and $50,440 per year);
- increasing the total yearly compensation requirement needed to exempt HCEs, which is currently at $100,000, to $122,148; and
- establishing a mechanism for automatically updating the salary and compensation levels going forward to assure that the levels accurately reflect economic reality.
What That Means
In essence, the proposed revision generally means higher minimum salaries in order to satisfy the federal white collar overtime exemptions. For example, an individual designated as within the “executive” exemption (which covers positions with management and supervisory responsibilities) must earn at least $47,892 to meet the criteria for the white collar exemption from overtime pay, regardless of his or her duties. Employees with management or supervisory responsibilities earning less than the proposed salary threshold will no longer be exempt and will be entitled to overtime pay for hours worked in excess of 40 per week.
The proposed regulation, which includes provisions for salary updates, also means that employers will have to remain alert and up-to-date on future changes to salary and compensation levels that must be met to qualify for exempt status.
What Employers Should Do Now
Once these proposed regulations are published in the Federal Register, which is anticipated to occur this week, there will be a period of 60 days within which interested parties can submit comments. Individuals, companies, and organizations interested in doing so should first do the following:
- Review the fact sheet published on the DOL’s website to obtain a high-level view of the basic provisions of the NPRM.
- Meet with key legal and human resources personnel within your organization to discuss whether to submit comments or to participate in a group effort to submit comments.
- Be aware that while the NPRM included no changes to the white collar “duties test,” the DOL has asked specifically for comments regarding what, if any changes should be made in that test and that it is therefore likely that such changes may be included in the final regulations.
- Begin to review the salary bands of employees to determine the effect of the proposed changes on existing job responsibilities and titles.
- Proactively prepare for reclassification of employees from exempt to non-exempt status in case the revisions are formalized.
- Recognize that nothing is final yet. In fact, with the notice and comment period, and with possible extensions of that period, the final regulations are not likely to go into effect until sometime in 2016.
For now, the best course of action is to become knowledgeable, stay informed, and work proactively to assure compliance with final regulations that are developed over the coming months.
There are many additional nuances to the DOL’s revisions to the Part 541 regulations, and it is important for employers to be knowledgeable of the law’s intricacies and to stay abreast of new changes.