The Department of Labor ("DOL") recently issued a notice of proposed rulemaking to the Fair Labor Standards Act ("FLSA") overtime regulations. The FLSA generally requires that employers pay employees overtime at a rate of one and one-half times their "regular rate" of pay for every hour they work in excess of 40 hours in a single workweek. The FLSA and its interpretative regulations, however, exempt certain groups of employees from the overtime pay requirements.
As anticipated, the proposed rules provide for some significant changes that could have a major impact on overtime entitlement to millions of workers who would not otherwise qualify for overtime under the current "white-collar" exemptions for executive, administrative and professional employees and certain highly compensated employees. Assuming the proposed changes are implemented, the DOL expects in excess of 4 million workers, who are currently exempt, will be entitled to overtime protection within the first year of implementation of the final rules. Below is a summary of some of the key changes to the proposed rules:
Increase of the salary requirement for executive, administrative and professional employees
The DOL’s regulations have generally required that three tests be met to qualify for the FLSA’s white-collar exemptions: (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; (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. The current salary threshold for exemption is $455 per week or $23,660 per year. The proposed rule significantly increases the standard salary level to the 40th percentile of weekly earnings for full-time salaried workers based on Bureau of Labor Statistics data. In 2013, that number would have equaled $921 per week (or just under $48,000 per year). The DOL projects that the 2016 level will increase to $970 per week, or $50,440 per year.
Increase of the salary requirement for highly compensated employees
The proposed rule also seeks to increase the income threshold for exemption as a "highly compensated employee" ("HCE"). The regulations currently exempt highly compensated employees who earn a minimum of $100,000 per year and "customarily and regularly" perform one of the exempt duties of an administrative, executive or professional employee, but who do not otherwise meet the duties test. The proposed rule suggests setting the salary threshold for the highly compensated employee exemption to the 90th percentile of weekly earnings for full-time salaried workers. In 2013, that amount was $122,148 annually according to the Bureau of Labor Statistics. The DOL does not propose what the amount will be in 2016.
Establishment of a mechanism for automatically updating salary levels going forward
In an effort to avoid having to issue formal rule-making revisions to the salary requirements set forth in the FLSA in the future, the DOL has proposed two different methodologies for updating the standard salary and HCE total annual compensation levels. One method would keep those levels set at the 40th and 90th percentiles of earnings for full-time salaried workers, respectively, based on data from the Bureau of Labor Statistics. The other method would adjust the standard salary and HCE compensation amounts based on changes in inflation, as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
The proposed changes clearly suggest that the DOL is attempting to focus on the salary requirement for determination of overtime entitlement and less on the duties portion of the tests for these exemptions. Rather than proposing any changes to the duties portion of the test, however, the DOL is soliciting public comment in response to specific questions:
The DOL is encouraging interested parties to submit comments on the proposed rules on or before September 4, 2015. The full text of the proposed rules, as well as information on the deadline for submitting comments and the procedures for submitting comments, can be found at the Wage and Hour Division's Proposed Rule website.
Moral of the Story for Employers
Employers are strongly encouraged to begin planning for anticipated changes to those positions that may no longer qualify for exemption under the proposed rules, which could significantly impact operations and finances. The DOL is expected to finalize the proposed rules next year and will likely provide a short grace period for compliance. Employers will need to budget for salary increases and/or increased overtime costs for at least part of 2016.
Our office will be providing a comprehensive training session for business owners and human resources professionals to explain this information in more detail. Stay tuned...