June 30, 2015

Proposed Rule Issued on Revising Exemptions From FLSA Minimum Wage and Overtime Requirements

On June 30, 2015, the U.S. Department of Labor (DOL) issued its long-awaited proposed rule updating and revising the Fair Labor Standards Act (FLSA) regulations governing the so-called “white collar” exemptions from the FLSA’s minimum wage and overtime requirements. Currently, to qualify for these exemptions, employees generally must meet certain criteria related to their job duties and be paid on a salary basis of at least $455 per week and at least $100,000 annually for the highly compensated employee exemption.

The new regulations, which follow President Obama’s March 2014 memorandum directing the DOL to revisit the white collar exemptions, would increase the weekly salary level applicable to most of these exemptions to an estimated $970 per week and to about $122,000 for highly compensated employees. The DOL also proposes automatically updating the salary level on an annual basis. Although the DOL has not revised the duties test applicable to the exemptions, it is considering doing so “to ensure that these tests fully reflect the purposes of the exemption.” If the DOL’s proposed rule becomes effective, it would significantly increase the number of employees eligible for overtime under the FLSA — estimated at close to five million more employees in the first year alone.

Background

The FLSA mandates that certain employees receive a minimum wage and premium pay if they work more than 40 hours in one workweek, unless they qualify for one or more exemptions. The “executive,” “administrative” and “professional” exemptions generally require that employees engage in certain job duties and be paid a predetermined and fixed salary that meets a minimum specified amount and is not subject to reduction because of variations in the quality or quantity of work performed. 

Under the current regulations, an executive, administrative or professional employee must be paid at least $455 per week ($23,660 per year for a full-year worker). The highly compensated employee exemption sets a minimum annual compensation of at least $100,000.

DOL’s Proposed Revisions

The DOL’s new rule, its first update to the salary level test since 2004, reflects its concern that if the salary level test is “left at the same amount over time … the effectiveness of the salary level test as a means of determining exempt status diminishes as the wages of employees entitled to overtime increase and the real value of the salary threshold falls.” Or, as the DOL further explains, the new regulations would correct for the salary levels set in 2004 being “too low” for the white collar exemptions.

Accordingly, the DOL proposes to set the standard salary level to the 40th percentile of weekly earnings for full-time salaried workers. If this standard is adopted, the DOL projects the salary level to be $970 per week or $50,440 per year. The DOL also proposes setting the highly compensated employee annual compensation level to equal to the 90th percentile of earnings for full-time salaried workers ($122,148 annually). (The DOL is also considering whether to allow nondiscretionary bonuses and incentive payments to satisfy a portion of the standard salary level test but does not propose specific regulatory changes.)

In addition, to avoid these new salary levels becoming “outdated,” the DOL proposes automatically updating the salary and compensation thresholds each year, using either a fixed percentile of wages or the consumer price index. The DOL seeks comments on which methodology would be most appropriate. The DOL would publish the revised salary and compensation levels annually (at least 60 days before the updated rates would become effective).

The DOL does not offer any proposals to modify the duties tests for the exemptions because updating the salary level “will assist in screening out employees who spend significant amounts of time on nonexempt duties and for whom exempt work is not their primary duty.” However, the DOL does invite comments as to the effectiveness of these tests, as it is “concerned” about exempt employees performing a disproportionate amount of nonexempt work. Possible revisions identified by the DOL include requiring overtime-ineligible employees to spend a specified amount of time performing their primary duty or otherwise limiting the amount of nonexempt work he or she may perform, as well as adding to the regulations additional examples for how the exemption may apply to particular occupations.

Implications of the DOL’s Proposed Rule

Most obviously, the DOL’s proposed rule would significantly enlarge the pool of employees eligible for overtime compensation, and in doing so, increase employers’ labor costs. 

The DOL estimates that its proposed rule would lead to approximately five million currently exempt employees becoming eligible for minimum wage and overtime protection. The agency estimates that almost six million employees would be affected by this change within 10 years, and more than $1 billion in wages would be paid to newly overtime-eligible employees.

The DOL’s suggestion that the proposed rule could reduce litigation costs remains to be seen. Notwithstanding the DOL’s view that the new rule would simplify the identification of overtime-eligible employees, battles likely will continue to be waged over whether potentially exempt employees qualify for the duties test that the DOL, at least as of now, has left unchanged. The plaintiffs’ bar also would have millions more potential clients to raise unpaid overtime compensation claims for alleged “off-the-clock” work and other theories. And employers also would have to contend with aggrieved employees if employers reduce their wages, modify their schedules or terminate them to avoid the new salary levels.

The public comment period will last 60 days. In light of what should be extensive commentary from multiple stakeholders on this issue, a Final Rule should be expected sometime in 2016.

The DOL’s announcement on the proposed rule and other information are available on the U.S. Department of Labor website.

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