Proposal would double salary threshold for overtime exemption
Posted On: 7-16-2015 | Posted By: Beth Fitzgerald
In response to a request from the Obama administration, the U.S. Department of Labor published proposed rules on July 6 that would modify the Fair Labor Standards Act, including a doubling of the minimum salary levels for exempt employees. The proposed rules are available for public comment through Friday, September 4, 2015, and are expected to be implemented during 2016. Though revisions will be made during the rulemaking process, employers should use the proposed rules to plan ahead.
The FLSA, which was created in 1938 and revised several times since, establishes the federal minimum wage and guidelines for payment and eligibility of overtime. Employers are not required to pay overtime to employees who qualify for any of seven exemptions. One exemption to be updated by the DOL proposal is the executive, administrative, or professional exemption, often referred to as the “white collar exemption.”
Exempt white-collar employees must meet three criteria: they are paid on a salary basis, as opposed to hourly; they earn at least the required minimum salary as defined by the FLSA; and they meet the requirements of the duties tests, meaning they primarily perform executive, administrative or professional duties as provided in the DOL regulations. Non-exempt employees are generally entitled to receive overtime pay at the rate of time-and-one-half, upon exceeding 40 hours worked per week.
Certain highly compensated employees are currently exempt from the FLSA’s overtime pay requirement if they are paid total annual compensation of at least $100,000, receive at least $455 per week paid on a salary basis, perform office or non-manual work, and regularly perform at least one of the exempt duties of an executive, administrative or professional employee.
The current minimum salary level for exempt employees is $455 per week, which is equivalent to $23,660 per year. The proposed rule would increase the salary level to a projected $970 per week for 2016, which is equivalent to $50,440 annually.
The DOL is also proposing to increase the minimum total annual compensation of $100,000 required to qualify for the highly compensated exemption to be equal to the 90th percentile of earnings for full-time salaried employees ($122,148 per year as of 2013).
Methodology that was established in 2004 for setting salary levels excluded the earnings of the lowest-paid 20% of salaried, full-time workers across the nation. The proposed rules would set the minimum salary level at the 40th percentile of salaries and the 90th percentile for highly compensated employees.
The proposed rules also suggest adopting a mechanism to automatically update annual minimum salary and compensation levels, based on either percentile or inflation. If inflation becomes the mechanism for automatic updates, the CPI-U (Consumer Price Index for All Urban Consumers) would likely be the tool by which these updates are calculated. The CPI-U does not measure inflation exactly – it is a metric by which the Bureau of Labor Statistics measures the cost of living for about 80% of the nation’s population.
In addition to implementing automatic updates, the DOL is considering whether to allow incentive compensation and nondiscretionary bonuses to count in determining the salary-level test. The DOL has specifically asked for remarks on these topics during the comment period.
Comments on the new proposed rules are due 60 days after publication, which means the deadline for submitting comments is September 4, unless an extension to the comment period is granted.
There are no proposed revisions to the duties tests for the white collar exemption, although changes could be put into effect when the final rules are issued. The DOL invites comments on whether changes should be made to the duties tests in light of their proposed changes. The DOL has also requested suggestions on adding occupational examples related to the duties tests.
It is unclear when the final regulations will be published, but it’s likely we can expect them before 2016. The effective date of the new regulations will likely occur at least 30-60 days after final regulations are published so employers should begin preparing for compliance now. Be sure employees are correctly classified under current rules. Employers should review job descriptions regularly, but it would be especially timely to do so now, with FLSA changes imminent.
For more information, see the DOL Wage and Hour Division fact sheet on the proposed rule.
Beth Fitzgerald is WK’s Human Resources Generalist.