On June 30, 2015, the U.S. Department of Labor issued its long-awaited and much-anticipated proposed rule that would change federal regulations dealing with overtime exemptions from the Fair Labor Standards Act for so-called white collar workers (e.g., executive and administrative employees). The proposed rule change is a result of a Presidential Memorandum signed by President Obama on March 13, 2014, in which he ordered the secretary of labor to modernize and streamline existing protections consistent with the intent of the FLSA, with a focus on increasing the salary levels required to qualify for exempt status.
It’s important to note that since the Fair Labor Standards Act of 1938, non-exempt covered workers must be paid 1.5 times their hourly wage for time worked beyond 40 hours per week.
Since the notice of proposed rulemaking (NPRM) is almost 300 pages long, it is not clear whether the president’s order regarding streamlining was followed. Nevertheless, a few points in the proposed rule are clear.
First, the proposed rule, if adopted, would increase the minimum salary threshold for exempt status (meaning the worker is not eligible for overtime) from the current $455 per week ($23,660 per year), to $921 per week ($47,892 per year). That increase is based on setting the salary level at the 40th percentile of weekly earnings for full-time salaried workers. It is anticipated that the weekly salary amount will be about $970 per week by the time the regulations are finalized next year. This proposed change was not a surprise, since the current salary threshold (annualized at $23,660 per year) is below the poverty level for a family of four.
Second, the proposed rule changes the income threshold for highly compensated employees. Currently, the total yearly compensation requirement is $100,000 for that exemption. The proposed compensation threshold is $122,148.
Third, the proposed rule would establish a mechanism for automatically updating the salary and compensation levels going forward to assure the levels accurately reflect economic reality. Two options mentioned would be maintaining the salary level at the 40 percentile of weekly wages of all full-time salaried employees, or to adjust the salary level test for changes in the Consumer Price Index for all urban consumers.
No changes to the “duties” tests for qualifying for the white collar exemption were proposed. The duties tests must be met, in addition to the salary threshold, to qualify for exempt status. However, the proposed rule asks for comments on whether the duties tests should be revised, and if so, how. Many employers are concerned that the duties test will be revised after the comment period is completed (currently 60 days, though extensions will likely be requested and granted) without any notice or chance to comment on specific changes.
The administration has pitched the NPRM as a boon to American workers, 5 million of whom would allegedly receive a pay increase as a result of their new, overtime-eligible status. In reality, however, employers will have plenty of control on how they respond to the proposed regulations, if adopted. Some may cut benefits to pay for increased salary requirements. Others will limit current employees to 40 hour weeks and hire workers to absorb the additional work hours rather than pay overtime. The estimated cost of implementation of the NPRM is more than $593 million.
It is likely Congress will get involved in looking for ways to circumvent the rules, but so long as the president holds the veto pen, any such efforts may not be successful. Employers who are concerned about the impact of the NPRM should get involved by submitting their own comments to the Department of Labor, or by adopting comments submitted by various industry trade associations they belong to. They should also start planning now for the new rules being effective sometime next year and looking at the best options for integrating the changes into their operational structures.
Greg Guidry, a shareholder in the Lafayette office of Ogletree Deakins, specializes in employment law.