The Law @ Work

DOL Announces Major Proposed Changes to Employee Exemption Rules

by John S. Gannon

According to Tom Petty, waiting is the hardest part.  Businesses who have been waiting for the Department of Labor’s (DOL) proposed amendments to the Fair Labor Standards Act (FLSA) are likely to disagree.  At the direction of the President, the DOL aims to significantly alter the “white collar” exemption rules for the first time in more than a decade.  The amendments would impact most employees making less than $50,440/year who are currently classified as exempt from overtime pay.

By way of background, employees may be classified as exempt from the FLSA’s overtime compensation requirements if they meet one of the “white collar” exemptions, which apply to executive, administrative, professional, and outside sales employees.  Exempt employees must meet the “primary duties” test for each exemption, and almost all need to be paid at or above the minimum salary threshold, which is $23,660/year ($455/week).  There are narrow exceptions to the minimum salary threshold for some professional employees and those working in outside sales.  Other than those narrow exceptions, employees who do not meet the primary duties test or  who are paid less than the minimum salary threshold must be paid an overtime premium of at least one and one-half times their regular rate of pay when they work more than 40 hours in a workweek.  The FLSA also calls for more rigorous recordkeeping when tracking the hours worked and compensation of nonexempt employees.

The DOL’s proposed amendments would increase the minimum salary threshold for exempt employees to $50,440 annually ($970/week).  This figure represents the 40th percentile of weekly earnings for full-time salaried workers according to data provided by the Bureau of Labor Statistics (BLS).  The DOL explains in the proposed rule that it has increased the salary level only seven times – in 1940, 1949, 1958, 1963, 1970, 1975, and 2004. “The lapses between rulemakings have resulted in salary levels that are based on outdated salary data and thus ill-equipped to help employers assess which employees are unlikely to meet the duties tests for the exemptions,” according to the Department. The DOL estimates that almost five million workers will no longer qualify as exempt based on the new salary level.  Notably, the DOL also proposes automatically updating to the minimum salary threshold each year based on similar BLS statistics.  The DOL plans to publish a notice with the new salary level at least 60 days before the updated rates would become effective.

The proposed amendments will also have an impact on higher wage earners.  Currently, highly compensated employees—defined as earning more than $100,000 in annual total compensation—are exempt from overtime compensation if they meet a scaled-down version of the “primary duties” test discussed above.  The DOL proposes increasing this salary threshold to $122,148 annually, which is equal to the 90th percentile of earnings for full-time salaried workers.

The DOL’s proposed amendments did not change any of the primary “white collar” job duties, or otherwise alter the exempt duties tests.  There was speculation that the duties tests would be modified to ensure more managerial employees, in particular working supervisors, would be entitled to overtime.  This did not happen; however, the DOL is soliciting questions from the public about how best to alter the duties tests.

Keep in mind that these are only proposed regulations, which must go through a public notice and comment period and therefore will not go into effect for some time.  The DOL encourages public comments, and information on submitting comments can be found on page 2 here.  Still, though the regulations may change based on the comments the DOL receives, it is clear that there will be major changes to the FLSA’s minimum salary threshold for exempt employees.  Employers should start planning and budgeting for these changes now.

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