On Tuesday, June 30, 2015, the United States Department of Labor (DOL) proposed a rule that would require employers to pay overtime to an estimated 4.6 million more employees by raising the minimum salary level required to qualify for the “white collar” exemptions under the Fair Labor Standards Act (the FLSA) to approximately $50,000 per year, more than double what it is today.

Existing Framework for Exemptions Remains Untouched

The new proposed rule would accomplish these sweeping results by making just a small number of changes. The basic framework for the “white collar” exemptions would likely remain unchanged. Under both the current rule and the proposed rule, employers need not pay overtime to executive, administrative, and professional employees for all work performed over forty hours in one week if the employees meet three tests: (1) the salary basis test, which provides that the employee must be paid a predetermined salary that is not subject to any reductions from week to week based upon the quality or quantity of work performed; (2) the salary level test, which sets forth the minimum specified amount of salary paid in order to qualify for an exemption; and (3) the duties test, which requires that the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.

The proposed regulations leave two of those three tests untouched, at least for now, and focus only on the salary level test, more than doubling the amount of salary a worker must receive to remain exempt from the FLSA’s overtime provisions.

The proposed rule did not make specific proposals to modify the duties tests, but instead asked for comments on whether “changes to the duties tests are also warranted.” It remains to be seen whether the final rule will contain any modifications to the duties tests.

Proposed Regulations Would More Than Double the Salary Level Threshold for Certain Exempt Employees

Under the current regulations, a bona fide executive, administrative, or professional employee must be paid at least $455 per week ($23,660 per year) to satisfy the “salary level test” to fall within these exemptions. The proposed rule would approximately double the salary level, requiring workers to earn a salary at or above the 40th percentile of earnings for full-time salaried workers ($921 per week, or $50,440 annually in 2016).

The proposed rule would also make changes to the exemption for highly compensated employees (HCE). In its 2004 amendments, the DOL created this HCE exemption. Currently, under this exemption, if an employee earns a salary of $100,000 or more and “customarily and regularly” performs one or more executive, administrative, or professional duties, he or she is exempt from the overtime provisions of the FLSA. 29 C.F.R. § 541.601(c). The HCE exemption is an acknowledgement that a high salary is an extremely strong indicator of an employee’s exempt status, therefore a less thorough examination of the employee’s duties is required. The DOL’s newly proposed rule would also bump this salary level up, from $100,000 to approximately $122,148 annually.

Proposed Rule Contains Automatic Updates to the Salary Level Threshold

Finally, the DOL noted that there was a need to update the salary level to prevent it from becoming out of date. Noting that there had been no updates to the rule for 29 years prior to the 2004 updates, the DOL proposed the establishment of a mechanism for automatically updating the compensation levels. The proposed rule suggests using either (1) a fixed percentile of wages or (2) the CPI-U, which is the Consumer Price Index for Urban Consumers.

What This Rule Means for Your Business

The proposed rule will require employers to revisit how they have categorized their employees as exempt or nonexempt. Of particular concern will be all those employees your business currently counts as exempt, but who earn less than the new salary threshold of approximately $50,440. A careful cost-benefit analysis will be required. For example, the employer may have to either (1) raise those employees’ salaries above the new threshold to maintain their exemption; or (2) forgo the raise, track the newly non-exempt employees’ work time, and pay those employees overtime for all hours worked over forty in one week. Employers may, of course, avoid paying overtime to such employees by ensuring that no more than forty hours of work is performed each week, but this becomes increasingly challenging given the practice of many employees to work after hours using laptops, tablets, and cell phones. Employers must be diligent in tracking and compensating all hours worked for the soon-to-expand non-exempt workforce.

The FLSA provides a two-year statute of limitations for claims for back overtime (three years for “willful violations”). “Willful violations” can result in payment of double damages as well. Employers should begin to plan now for the inevitability that many formerly-exempt salaried employees will become among those eligible for time-and-a-half for all hours worked over forty per week.

The next step will be a sixty-day comment period in which stakeholders and citizens can submit comments on the proposed rule. The administration is required to consider these comments before announcing a final rule, which is expected to go into effect in 2016.

Calfee welcomes the opportunity to assist you as to wage and hour compliance issues, including preparing for implementation of these new overtime regulations.