The U.S. Department of Labor (“DOL”) is likely to publish its new overtime rule changes in the very near future.1 Currently, employees who are designated as salaried employees in “managerial” positions are exempt from overtime if they meet certain minimum “tests” related to their primary job duties and they are paid on a salary basis at a certain threshold. That threshold is currently at $455 a week (or $23,660 per year), and it is expected to increase to $970 a week (or $50,440 per year) in 2016. Among other things, the new regulations propose to set the salary level at the 40th percentile of weekly earnings for full-time salaried workers. In addition, the regulations propose to increase the total annual compensation requirement that typically exempts highly compensated employees to the 90th percentile of weekly earnings for full-time workers (or $122,148 per year).
What is the practical effect of this change and what prompted it? According to the DOL, some workers are expected to work 50-60 hours a week (or more), but end up making less than the poverty level for a family of four. The salary threshold change is designed to ensure that employers are fairly compensating employees for their work. The effect of the change will extend overtime protections to nearly 5 million white collar workers who are currently exempt from overtime pay, but whose salaries are relatively low. The changes are stated as being “[c]onsistent with the President's goal of ensuring workers are paid a fair day's pay for a fair day's work, the memorandum instructed the Department to look for ways to modernize and simplify the regulations while ensuring that the [protections of the Fair Labor Standards Act] are fully implemented."2 The current low salary threshold is the result of the threshold not having increased with inflation. The exemption was originally meant to apply to highly-compensated, executive, administrative, and professional employees, but is currently being applied to those workers earning as little as $23,660 per year.
Since 1940, the regulations implementing the white collar exemption have generally required each of three tests to be met for the exemption to apply: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”). One of the DOL’s primary goals in this rulemaking is updating the exemption's salary level test.
Once the new regulation is published, employers will have little time to get into compliance with the new regulations, which are drastic. All employers are best served to consider how the regulations will affect their business and get a plan in place to effectuate the changes once they become final. Employers will need to either increase exempt employees’ salaries to meet the new threshold or they will need to change some workers’ statuses to non-exempt and start paying overtime. Either way, the new rules will represent a major change for many employers so they will need to start preparing for it.