The Department of Labor (DOL) released its long-awaited proposed changes to the regulations defining which white collar workers are eligible for minimum wage and overtime protections under the Fair Labor Standard Act (FLSA). The proposed rules were announced Tuesday, June 30 and interested parties can submit written comments over the next two months. Comments must be made on or before Sept. 4, 2015.

In general, the FLSA requires most employers to pay their employees the minimum wage plus time-and-a-half for any hours worked over 40 hours. White-collar workers such as executive, administrative, professional, outside sales and computer employees are, under certain conditions, exempt from the overtime protections. To qualify for the “white collar” exemption under the present rules, the worker must earn a salary over the threshold of $23,600 a year or $455 a week and meet the standard duties test.

Both the salary and duties qualifications could change under the proposed rules.

In drafting the proposed rules, the DOL seeks to:

  • Update the salary level to guarantee that FLSA’s overtime safeguards are effective,
  • Simplify the identification of nonexempt employees,
  • Automatically update the salary levels yearly to keep them current with the times, and
  • Determine whether revisions to the duties tests are necessary.

When the changes become effective, they will affect almost all employers, particularly those in hospitality, retail, social services, education, healthcare or manufacturing. As proposed, there is no exemption for most small businesses, non-profits or government. While they are recommended changes, it is safe to assume that new salary requirements will take place.

What are the five major changes and how do they affect employers?

  1. The big change is to raise the minimum annual salary level for white-collar exemptions up to $47,893 a year or $921 a week in 2015 and roughly $50,440 or $970 a week in 2016. (The current salary exemption is $23,660 or $455 a week.) This could mean that by simply using salary as a baseline determination, more white-collar employees may be eligible for overtime, effectively raising labor costs. Clearly these increased labor costs will ultimately affect your bottom line.  
  2. The minimum salary for employees covered under the “highly compensated employee” exemption from overtime will increase from $100,000 in total compensation yearly to $122,148 and be indexed to the 90th percentile of weekly full-time employee earnings. Again, this could mean more of your “highly compensated employees” might be eligible for overtime pay, increasing labor costs.  
  3. After 2016, salary levels will automatically increase to the 40th percentile of weekly earnings for full-time employees or as the Consumer Price Index for All Urban Consumers cost of living changes. The DOL believes this salary level minimizes the risk that employees legally entitled to overtime will be subject to misclassification based solely on the salaries they receive.  The DOL estimates the per year aggregate direct cost to employers of the proposed rule may be between $239.6 million and $255.3 million. While employers can continue to maintain part-time exempt positions, it could be a more expensive proposition and complicate some flexible work arrangements.   
  4. The DOL is seeking comment on the addition of performance or production bonuses to the base salary to meet the new salary level test.  Employers who consider these bonuses as part of compensation could be adversely affected if they were excluded from the calculation of exempt status. Exclusion of bonuses could place formerly exempt salaried employees into the non-exempt category making them possibly eligible for overtime pay.  
  5. The DOL is asking for comment on the Standard Duties test for white-collar workers. They are seeking to define a new minimum percent of the employee's time doing exempt work in order to be classified an exempt employee. The DOL declined making revisions to the “duties test” at this time thinking that increasing the salary threshold for the exemptions would make it less likely that employees will be miscategorized as exempt.

What should Michigan Employers do?

The rules are proposed rules. There are 60 days to submit comments and then the DOL will modify them, but it is probable that the final rules won’t take effect until next year. This gives employers time to make comments and to plan ahead. If you wish to submit comments to the Department of Labor, Foster Swift attorneys can help.

Now is a good time to think about your work staff and possible reclassification of employees so you’re prepared for the coming changes. Foster Swift's employment group can help with an audit of the structure of your workforce and your hiring and firing systems.