Why it matters

Expanding the scope of employees eligible for overtime, the Department of Labor (DOL) released its long-awaited new rules revising the white collar exemption found in section 13(a)(1) of the Fair Labor Standards Act (FLSA) so that it would allow salaried executive, administrative, and professional workers earning up to $50,440 to be eligible for overtime pay—a huge increase from the current salary of $23,660. The notice of proposed rulemaking (NPRM) would also increase the annual compensation threshold for exempt highly compensated employees from the current $100,000 to $122,148. With the NPRM now open for public comment, the DOL requested input on issues such as the best way to determine annual updates to salary levels going forward and whether to allow commissions to satisfy some portion of the required salary level. In addition to the salary changes, the agency hinted at possible changes to the duties test, querying whether the current duties test of exempt status should be modified, possibly adopting the “California method” requiring that exempt employees spend more than half of their working time on exempt tasks to qualify. An estimated 5 million workers would be impacted by the proposed rules, the DOL said, which would take effect in 2016.

Detailed discussion

In the first change to federal overtime rules since 2004, the Department of Labor (DOL) released a notice of proposed rulemaking (NPRM) titled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” drastically increasing the number of salaried workers eligible for time-and-a-half pay.

The proposed revisions to section 13(a)(1) of the Fair Labor Standards Act’s (FLSA) white collar exemption are long overdue, President Barack Obama wrote in an op-ed announcing the changes. Last March, he signed a memorandum instructing Secretary of Labor Thomas Perez to “modernize and streamline” the regulations.

The FLSA provides that employees who work in excess of 40 hours per week must receive overtime pay of at least 1.5 times their hourly rate unless exempted. Under the current regulations, an employee must be earning at least $455 per week to qualify for the exemption (or $23,660 per year) and must hold a position that falls within the DOL’s classifications of “white collar” jobs, or executive, administrative, and professional positions by meeting the “duties test” for one of the categories.

A separate category of workers known as highly compensated employees may also be exempt from overtime if they both earn more than $100,000 per year (including commissions and nondiscretionary bonuses) and “customarily and regularly” perform the duties of one of the white collar positions, earning at least $455 per week.

The NPRM would greatly expand the number of employees eligible for overtime, estimated by the DOL to be about 5 million, by raising the salary floor as well as possibly tweaking the duties test.

Specifically, the new regulations would more than double the annual floor to $50,440, or $970 per week. The new rules would also provide for regular increases by establishing a mechanism to automatically update the salary and compensation levels going forward.

One open question the DOL requested comment on from stakeholders: whether non-discretionary bonuses and other payments should be part of an exempt employee’s salary in order to meet the new salary level test. Would 10 percent of the salary limit be an appropriate interval for such nondiscretionary compensation, the agency wondered, with the remaining 90 percent paid on a salary or fee basis.

The DOL asked for input on other issues such as what industries commonly have pay arrangements that include nondiscretionary bonuses and incentive payments and what types of employees generally earn them, as well as the types of nondiscretionary compensation employees receive and “to what extent including nondiscretionary bonuses and incentive payments as part of the salary level would advance or hinder that test’s ability to serve as a dividing line between exempt and nonexempt employees.”

The test of employees’ duties was not the subject of any DOL tweaks. Instead, the agency included possible changes to the test in its list of issues open for public comment, noting that employers have advocated for maintaining the current test, established in 2004. A new test could result in “costly litigation,” the agency acknowledged, but said employees have argued that under the current test, they can spend more than 90 percent of their time on nonexempt work.

Do the tests as currently set forth adequately determine whether an employee qualifies as exempt or non-exempt, or do exempt employees currently perform a disproportionate amount of non-exempt work, the DOL asked, inviting “comments on whether adjustments to the duties tests are necessary, particularly in light of the proposed change in the salary level test.”

The agency asked for additional information on possible alternatives to the existing test, such as if employees should be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for the exemption, and if so, what the minimum amount should be, or if the DOL should look to California’s law requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty. Or is a threshold other than half of an employee’s time a better indicator of the realities of the workplace today, the agency asked.

While the department noted that it “is not proposing specific regulatory changes at this time,” the NPRM seeks “additional information on the duties tests for consideration in the final rule,” leaving open the possibility of changes.

Interested parties have until September 4, 2015 to comment on the proposal.

To read President Obama’s op-ed, click here.

To read the DOL’s NPRM, click here.