On Monday July 6, 2015 the Obama Administration and U.S. Department of Labor (DOL or Department) published their proposal to revise the Part 541 overtime exemption regulations in the Federal Register, beginning the required 60-day comment period. It is crucial that all employers submit thorough and thoughtful comments on not just the proposed over-100 percent increase in the minimum salary for all white collar exemptions but also on the DOL’s specific request for comments on the possible need for change in the duties test. Any new duties test rule could have a profound impact on both employees meeting the new minimum salary test and entire classes of currently exempt managerial and administrative employees who will not meet the proposed new highly compensated employee test of at least $122,148.
Comments Needed on Non-Specific Proposed New Requirements
While the DOL made a specific proposal to increase the standard minimum salary amount, it did not issue any specific proposals with respect to a number of other important areas in the current Final Rule 541 requirements, which, if changed, could also eliminate the exemption of many currently exempt employees. However, it is clear from the 295-page proposal that the DOL will be making important additional revisions in the Final Rule including the possible inclusion of a new duties test that could be as high as the California minimum 50 percent exempt duties test.
The following are four major areas in which, unlike the basic proposed minimum salary increase, the DOL has not made a specific proposed rule change, but has asked for comments and indicated the possibility of including a new requirement in the Final Rule:
- the primary duties test;
- a method for automatic annual updating of the minimum salary requirement;
- the possible inclusion of nondiscretionary bonuses or other incentive pay in the standard minimum salary amount; and
- the possible inclusion of additional examples of how the exemption criteria apply to specific occupations including those in the computer and information technology sectors.
1. The Primary Duties Test
There should be no question that the DOL is seriously considering including a revised primary duties test in the Final Rule. This is made clear by the language of the proposal:
The Department is also considering revisions to the duties test in order to ensure that they fully reflect the purpose of the exemption
. . .
While the Department is not proposing specific regulatory changes at this time, the Department is seeking additional information on the duties test for consideration in the Final Rule. (emphasis added)
The DOL has solicited comments by asking questions in five specific areas. The most ominous of these is,
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?
This 50 percent test in California is known as the “Primarily Engaged In Test.”
As the DOL realized in 2004 during the process of adopting the existing Part 541 Final Rule, use of a fixed percentage on the quantity of exempt duties that a worker performs may lead to increased litigation over whether an employee qualifies as exempt—with the accompanying uncertain results. This is precisely the result in California where the Primarily Engaged In test has led to continuous litigation, including large and expensive class-action cases involving disputes over the precise percentage of non-exempt and exempt duties that highly salaried executive, administrative, and professional employees perform. The litigation trend continues despite the fact that California’s minimum salary level is already $37,440 and set to increase to $41,600 on January 1, 2016.
Employee stakeholders, including unions and plaintiffs’ attorneys, have already made it clear they will be submitting extensive comments setting out their position that the current duties test is insufficiently protective of employees and should be increased to reflect the California 50 percent Primarily Engaged In test. Employers must be prepared to provide sufficient comments to, at a minimum, provide support for subsequent litigation to prevent the enforcement of such a new test should the DOL include this or any similar new duties test in its Final Rule.
2. Method for Automatic Annual Updating of Minimum Salary Requirement
The DOL has proposed including in the Final Rule “a mechanism for automatically updating the standard salary test, as well as the total annual compensation requirement for highly compensated employees.” The DOL has not, however, indicated what that “mechanism” should be. The DOL has proposed two alternative methods and asked for comments on which should be included in the Final Rule. The first is “maintaining the standard salary level at the 40th percentile of weekly wages of all full-time salaried workers.” The second is “updating the standard salary threshold based on changes in the CPI-U.” It is, therefore, important that employers comment on both why there should be no automatic yearly increase “mechanism,” and why each of the proposed alternatives should not be used.
3. Possible Inclusion of Nondiscretionary Bonuses or Other Incentive Pay in the Standard Minimum Salary Amount
The DOL indicates that it is considering permitting employers to include some amount of nondiscretionary bonuses or other incentive compensation in only the standard salary test amount (and not the highly compensated test). While indicating that it envisions requiring any such amount to be received “monthly or more frequently” and that “it is important to strictly limit the amount” that could be applied, perhaps to 10 percent of the standard weekly salary level, it again invites comments without actually proposing any specifics as to what it will include in the Final Rule. In addition, while stating that “The Department is also concerned it would be inappropriate to count commissions toward the salary level requirement,” it invites “comments on the appropriateness of including commissions as part of nondiscretionary bonuses and other incentive payments.” Given these non-specific proposals by the DOL, it is important that employers make their positions on the topic of including all forms of nondiscretionary bonus and other incentive pay, including commissions, known through the formal comment process.
4. Possible Inclusion of Additional Examples of how the Exemption Criteria Applies to Specific Occupations Including Those in the Computer and Information Technology Sectors
Finally, the DOL states that it “is also considering whether to add to the regulations examples of additional occupations to provide guidance in administering the EAP exemptions.” The DOL is doing this without any indication of what occupations it will define as being either exempt, or more importantly, non-exempt, in the Final Rule. Given the recent history of attempted enforcement actions by the DOL with respect to a number of occupations previously determined to be exempt, it can be anticipated that any new “examples” in the Final Rule will indicate the non-exemption of entire classes of jobs. Employers should provide extensive justification for exempt status for any occupations they believe the DOL will attempt to define as non-exempt in the Final Rule.
Actions to be Taken by Employers
As is evident by the DOL’s many non-specific and open-ended proposals, it is imperative for all employers to act in submitting comments on the DOL’s proposed changes. While trade associations and other employer advocacy groups will be submitting comments on behalf of members, the quantity and quality of comments by individual employers to all of the DOL’s proposals will be crucial to preventing possible wholesale revisions to the Part 541 regulations that could continue well into the future.