The Proposed Overtime Regulations: Are Your White Collar Employees Still Exempt?

On June 30, 2015, the U.S. Department of Labor (DOL) announced its long-awaited proposed rule that would revise the regulations concerning the white collar exemption contained in section 13(a)(1) of the Fair Labor Standards Act (FLSA). According to the announcement, the proposed rule would “extend overtime protections to nearly 5 million white collar workers within the first year of its implementation.”

Among the sweeping changes included in the proposal is a call for an increase in the minimum salary for the executive, administrative, and professional exemptions from $455 per week—$23,660 annually—to a salary not less than $921 per week—which annualizes to $47,892. The DOL proposes to increase the minimum salary level to the 40^th percentile of weekly earnings for full-time salaried workers. Similarly, the Department of Labor is proposing to increase the minimum salary for highly compensated employees to an annual compensation of $122,148.  Using this methodology to determine a salary level and automatically adjusting it as DOL proposes, it is projected that the salary level would be approximately $970 per week, or $50,400 annually, by the time a final rule is issued in 2016.

The benchmark for the annual compensation level applied to highly compensated employees is based upon the 90^th percentile of weekly earnings for full-time salaried workers. The DOL stated that one of its primary goals is to update the overtime exemptions by increasing the salary level which is “the best single test” of exempt status. According to the agency’s announcement the “[f]ailure to update the overtime regulations” has created “an exception to overtime eligibility originally meant for highly-compensated executive, administrative, and professional employees now applying to workers earning as little as $23,660 a year.”

With respect to the duties’ test, the Department of Labor did not make any substantive proposals. Rather, it is requesting comments on whether the duty tests adequately determine whether an employee qualifies as exempt or non-exempt and whether the current tests permit exempt employees to perform a disproportionate amount of non-exempt work.

The revisions are scheduled to be published in the Federal Register shortly, and the proposal has a comment period that ends 60 days after publication.

Key Components of the DOL’s Proposed Revisions: Minimum Salary

Regulatory History

The DOL, in the notice of proposed rulemaking, went to great lengths to trace the development of the salary level or amount tests since the FLSA was enacted in 1938. It details the methodologies used and data considered by the agency in revising the salary levels 7 times since 1938. The DOL subsequently issued revised regulations and interpretations in 1947, 1954, 1958, 1961, 1963, 1967, 1970, 1973, 1975, and twice in 1992. In 1975, the DOL decided that to qualify for the white collar exemption to the overtime laws, employee must be making at least $250 per week.

In 2004, the DOL made significant changes to the Part 541 regulations. At that time, the Department of Labor increased the salary level for the first time since 1975. The change increased the threshold below which white collar workers were entitled to overtime pay to $455 per week. This was the last time that the DOL revised the Part 541 regulations.

On March 13, 2014, President Obama signed a presidential memorandum instructing the U.S. Secretary of Labor Thomas E. Perez to update regulations regarding overtime protections with the intent of increasing the number of employees who are eligible for overtime under the federal FLSA.

On May 5, 2015, the DOL announced that it had sent its draft proposed Part 541 overtime regulations to the Office of the Information and Regulatory Affairs (OIRA) at the Office of Management and Budget for review.

Proposed Revisions

The most significant aspect of the proposal is the sizeable increase in the minimum salary requirements for the executive, administrative, and professional exemptions. The proposed regulations more than doubled the current minimum salary of $455 per week to a minimum of $921 per week.

In a departure from prior rulemakings, the Department of Labor also is proposing a methodology to automatically increase the salary level and annual compensation threshold on an annual basis by either maintaining the levels at a fixed percentile of weekly wages of all full-time salaried employees or adjusting these amounts for changes in the Consumer Price Index for all urban consumers (CPI-U).

Finally, the DOL is considering an option to permit employers to include certain non-discretionary bonuses and other payments as part of an exempt employee’s salary in order to meet any new salary level test. The agency suggested that such payments could constitute 10 percent of an employee’s salary and that such bonuses be paid on a monthly basis, if not more frequently.

The DOL has specifically requested comments on these suggestions. Employers should weigh in on these options as a way to satisfy a significantly higher salary level test that will be in the DOL’s final rule.

Key Components of the DOL’s Proposed Revisions: Duties Requirements

The Duties Test History

The NPRM reviews the history of the duties test as well, stating that from 1949 until 2004 the overtime regulations included two different duties tests for executive, administrative, and professional employees depending on their salary: (1) a long duties test for employees paid a lower salary and (2) a short duties test for more highly-paid employees.

In 2004, the DOL replaced the long and short tests with a single test. Under the standard text that has been used since 2004, an employee would qualify as an executive employee under the following conditions:

• his or her primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
• the employee customarily and regularly directs the work of two or more other employees;
• the employee has the authority to hire or fire other employees or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees are given particular weight.

 

Proposed Revisions

The DOL explained that employer stakeholders have advocated for maintaining the current 2004 test. In particular, the DOL noted that retail and restaurant employers have stressed how important it is for managers to be able to assist employees from time to time to enhance the “customer experience.” The NPRM also acknowledged that employers understand the current test and how to apply it, whereas a new test would likely “engender costly litigation.”

On the other hand, the NPRM noted that according to employee stakeholders the current test is not sufficiently protective of employees—some of whom “have spent large amounts of time (sometimes more than 90 percent) performing nonexempt work.”

Finally, the DOL noted that the salary level test and the duties test work in tandem such that “[a] regularly updated 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.” Thus, rather than put forth a new duties test, the DOL “invites comments on whether adjustments to the duties tests are necessary, particularly in light of the proposed change in the salary level test.”

In the absence of a specific proposal, in order to formulate a final rule, the DOL is “seeking additional information on the duties tests,” and is specifically seeking comments on the following issues:

A. What, if any, changes should be made to the duties tests?

B. Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?

C. Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model? Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?

D. Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the Department reconsider our decision to eliminate the long/short duties tests structure?

E. Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?

Action Items Before the Final Regulations Are Issued

Following publication in the Federal Register, the next step will be the submission of written comments regarding the proposed regulations. The DOL is required to review the comments prior to issuing final regulations—and this review process likely will take 12 or more months. The notice and comment period will run for 60 days. All affected employers should plan to submit comments to the DOL in response to the proposed regulations.

There are many additional nuances to the DOL’s revisions to the Part 541 regulations, and it is important for employers to be knowledgeable of the law’s intricacies and to stay abreast of new changes. For an in-depth review of the revisions, join us for our upcoming webinar, “DOL’S Proposed Part 541 Regulations: How Will They Change The Overtime Exemptions?,” featuring Alfred B. Robinson, Jr. (shareholder, Washington, D.C.) on Thursday, July 9, 2015 at 11 a.m. Pacific and 2 p.m. Eastern.