The U.S. Department of Labor (“DOL”) has finally revealed its eagerly anticipated proposed changes to the Fair Labor Standards Act’s (“FLSA”) overtime exemptions. See 80 F.R. 38515 (July 6, 2015). Employers should brace themselves for significant changes (and costs) because the DOL predicts that the proposal could affect nearly 4.7 million workers, all of whom would become eligible for overtime pay.
The FLSA governs minimum wage payment and overtime pay. It created the 40 hour workweek and the requirement that employees be paid a premium (“time-and-a-half”) for any hours worked in excess of 40 per workweek. Employers are not required to pay the overtime premium to all employees, however, because the FLSA specifically exempts certain categories of “white collar” workers (e.g., executive, administrative, professional, etc.). Currently, these “exempt” employees must (i) meet a statutory minimum salary threshold of $23,660 per year ($455 per week) and (ii) meet various “duties tests” that include, for example, managing, supervising, running a business, exercising discretion and independent judgment on significant matters, and/or performing tasks that require advanced knowledge.
If implemented, the DOL’s proposed new rule will revise the current overtime exemption requirements under the FLSA. Its primary proposed change raises the salary threshold for the “white collar” overtime exemptions from $23,660 to $50,440. The proposed change is an attempt to match the earning threshold at the 40th percentile of weekly earnings for full-time salaried employees.
This salary increase addresses the DOL’s concern that the salary threshold (last revised in 2004) is too low to efficiently separate truly exempt employees from non-exempt employees. Because the proposed new rule more than doubles the previous threshold, millions of employees who currently fit into an overtime exemption would suddenly be entitled to overtime premiums for any hour they work over 40 hours in a workweek. As mentioned above, the DOL anticipates that this change will expand overtime eligibility to nearly five million employees within the first year of enactment.
Although the salary threshold has been raised in the past (as recently as 2004), it has never been increased by such a large percentage. Furthermore, rather than peg the new earning threshold at a certain dollar amount, the proposed changes include a “mechanism to automatically update the salary and compensation thresholds on an annual basis using either a fixed percentile of wages or the CPI-U (Consumer Price Index for Urban Consumers).” Therefore, if the rule becomes final, employers will be required to reassess their employees’ pay each year to determine eligibility for overtime exemptions.
The proposed changes also increase the salary threshold for the “highly compensated employee” exemption, which is currently at $100,000. The rule is expected to change that amount to $122,148, which is the 90th percentile for full-time salaried employees.
Surprisingly, the DOL’s proposed changes do not alter the standard duties tests for determining whether employees perform exempt work. Consequently, employers can continue to utilize the same tests for determining whether an employee qualifies for the “managerial” or “administrative” exemptions, for example. Despite not proposing any changes, the DOL is seeking comments on whether the tests in their current form are working as intended. Specifically, the DOL seeks comment on the following 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 DOL look to the State of California’s law (requiring that more than 50 percent of an employee’s time is 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 DOL 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?
This request for comments suggests that the DOL is in the process of changing these tests, which could mean that soon even more employees would no longer qualify for an overtime exemption under the FLSA.
The DOL is also seeking comments related to the calculation of an employee’s yearly salary. In the past, the DOL instructed employers to count only “actual salary” and fees, excluding bonus payments of any kind. This meant that an employee who earned a $23,000 salary and a $1,000 bonus in a single year would not meet the $23,660 threshold level for exemption. The proposed change makes no mention of bonuses, but the DOL has requested comments on whether nondiscretionary bonuses (e.g., performance bonuses) should be included in determining whether an employee’s salary has hit the earning threshold.
The public comment period on the DOL’s proposed changes runs through September 4, 2015. Employers can voice their opinions by commenting on the rule here. Employers should also take an active approach by preparing for the rule’s expected implementation in 2016. Companies that have not done a classification audit in the past several years should consider conducting one before the proposed changes go into effect.