On June 30, the Wage and Hour Division of the U.S. Department of Labor (DOL) issued its much-anticipated Notice of Proposed Rulemaking (NPRM) on “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees.”1 This NPRM updated the overtime exemption requirements of the Fair Labor Standards Act (FLSA), also known as the “white collar” exemptions. The revisions are largely focused on increases to salary thresholds and possibly including non-discretionary bonuses and incentive payments in those thresholds. Changes to the duties tests have not been proposed, but these tests will still apply to those employees who meet the new salary threshold. These proposed changes will be the eighth time since the FLSA’s inception that increases to the salary requirement have been proposed for the FLSA exemptions.
Since it was enacted by Congress in 1938, the FLSA has provided basic wage rights and protections. The minimum wage rate and overtime requirements are among those protections. The FLSA requires that overtime of one and a half times the regular rate of pay be provided for all hours worked in excess of 40 hours in a week. Exceptions to the overtime pay requirements, however, include exemptions for executive, administrative and professional employees, often referred to as the “white collar” or “EAP” exemptions. Exemptions are applied to employees who meet three requirements: (1) the employee must be paid a fixed and predetermined salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid must meet a minimum specified amount; and (3) the employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations.
In March 2014, President Obama directed the U.S. Secretary of Labor to propose revisions to the FLSA to update and simplify the exemptions. Since then, employers and employment lawyers alike have eagerly awaited the proposed revisions. The Secretary was charged with making revisions that would “modernize and streamline the existing overtime regulations … address the changing nature of the workplace; and simplify the regulations to make them easier for both workers and businesses to understand and apply.”2 Originally promised by November 2014, the revisions were delayed in October and anticipated in February 2015. The proposed rulemaking was submitted to the Office of Management and Budget in early May 2015 and is finally available for analysis and comment.
Among the revisions is an increase in the minimum salary requirement for exempt employees. Currently, the “white collar” exemptions exclude from overtime requirements those workers who were paid a salary of at least $455 per week or $23,660 per year, and who performed certain job duties. The June 30, 2015, NPRM proposes to increase the wage threshold to $921 per week or $47,892 per year. The increase is based on the standard salary level at the 40th percentile of all full-time salaried employees in 2013. The exemption for highly compensated employees will also be raised from $100,000 total annual compensation to $122,148 annually, the value of the 90th percentile of all full-time salaried employees. The DOL further proposes to automatically update the base salary amount each year based on either a fixed percentile of earnings or on changes in the Consumer Price Index for All Urban Consumers (CPI-U). This means that employers must either boost the salaries of employees who barely meet the threshold or take alternative actions to comply with the regulations, such as reclassifying the employees as non-exempt.
The same proportional salary increase is proposed for the current exemption for the motion picture producing industry. The current salary threshold for salaried employees under the motion picture producing exemption is $695 per week. The NPRM proposes to raise this threshold to $1,404 per week, or the proportionate amount required by the number of days worked.
An important item for consideration in the NPRM is whether to include non-discretionary bonuses and incentive payments as part of the salary calculation for exempt employees. Currently, bonuses and incentive payments are not considered to be part of the threshold salary amounts. The DOL is aware, however, that non-discretionary bonuses and incentive payments play a large role in modern compensation schemes and, in an effort to modernize the rules, the DOL is considering whether it is appropriate to include these payments as part of the salary threshold calculation for the executive, administrative and professional exemptions as well as the highly compensated employee exemption. The NPRM, however, proposes to cap the amount of non-discretionary bonuses and incentives that may be included in the salary calculation at 10% of the weekly salary level. These bonuses, as well as catch-up payments under the highly compensated employee exemption, must be made monthly or more frequently. The DOL said that making the payment annually undermines the protection of the salary requirement that requires employers to pay employees a minimum level of compensation on a consistent basis.
In addition to meeting a salary threshold, employees must still have certain job duties that come within one of the exemption categories. The focus of the revisions, however, is on the salary increase. The DOL believes that the salary threshold is the best test of exempt status. It theorizes that, by increasing the salary requirement, employees who meet the duties requirement of the “white collar” exemptions will be more easily distinguished from those who do not, without the need for performing the long duties test. Employers will likely have fewer employees who meet the salary threshold and, therefore, fewer employees against whom the duties test must be applied. The result, the DOL proposes, will simplify the exemption rule. And while the DOL has not proposed any changes to the standard duties tests, it is seeking comments on the effectiveness of the current tests.
The executive exemption applies to employees whose primary work duties include managing the enterprise or a department or subdivision of the enterprise; customarily and regularly directing the work of at least two or more other full-time employees or their equivalent; and have the authority to hire or fire employees (or whose opinion about hiring and firing employees or changing employees’ employment status is given particular weight).
The administrative exemption applies to employees whose primary job duties include the performance of office or non-manual work directly related to management or general business operations of either the employer or the employer’s customers. The employee’s primary duties must include the ability to exercise discretion and independent judgment on matters of significance.
The professional exemption applies to those of a “learned profession.” The employee’s primary duties must be the performance of work that requires advanced knowledge, defined as work that is predominantly intellectual in character and must be in a field of science or learning. The advanced knowledge must be acquired by a prolonged course of specialized intellectual instruction. The exemption requires the consistent exercise of discretion and judgment.
The outside sales employee exemption requires that the employee’s primary duty must be making sales (as defined in the FLSA) or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer. The employee must also be customarily and regularly engaged away from the employer’s place or places of business.
The computer employee exemption applies to employees employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing specific duties. These duties include the application of these specific skills or a combination of these skills.
The DOL, in the NPRM, expressed concern that employees classified as exempt are performing more non-exempt duties than exempt duties, making the classification questionable. While specific changes to the duties test have not been proposed, the duties test will still be applied to examine those employees who meet the new salary threshold. Employers, therefore, should carefully review job descriptions and duties, and speak with managers and supervisors to ensure that the descriptions are accurate and complete and include all essential functions. Moreover, employers should ensure that exempt employees are performing exempt duties more often than non-exempt duties.
The NPRM invites comments on the proposed changes for a period of 60 days from the date of publication of the NPRM in the Federal Register, on July 6, 2015. The comments period will close on September 4, 2015. During this time, employers should review the job duties of exempt positions, particularly those positions that barely meet the minimum FLSA exemption requirements. Employee classifications, pay structures and work schedules across the company may be impacted. Restructuring pay, shifting job responsibilities and reclassifying certain employees may be necessary for compliance if the proposed changes are enacted as described in the NPRM.