In March 2014, President Obama directed the Department of Labor (DOL) to update the regulations defining which workers qualify for the most common exemptions from the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA). To qualify as an exempt executive, administrative or professional employee, an employee must satisfy two tests: (1) the employee's primary duties must involve those executive, administrative or professional duties set forth in the DOL's regulations, and (2) the employee (except for physicians, lawyers and teachers) must be paid on a salary basis at or above the minimum salary level.
The Proposed New Rules
The DOL has raised the minimum salary level seven times since the FLSA was enacted in 1938, most recently in 2004. Under current regulations, the minimum salary level is $455 per week ($23,660 per year for a full-time worker). In a Notice of Proposed Rulemaking (NPRM) released on June 30, 2015, the DOL, for the first time, proposed indexing the salary level so that it will increase on an annual basis. The DOL proposes to set the salary level at the 40th percentile of earnings for full-time salaried workers, which the DOL projects will be $970 per week ($50,440 annually) in 2016.
The DOL is also proposing to raise the present $100,000 salary level for employees to qualify for the highly compensated employee exemption. Under the proposed rule, the salary level will be set at the 90th percentile of wages for all full-time salaried employees, which is projected to be $122,148 per year in 2016.
The salary levels in the NPRM are just proposals; the DOL may change the salary level in the final rule. Even if the individual levels proposed in the NPRM are retained, the dollar amounts announced by DOL are projections of what the indexed amounts will be in 2016; the final amounts may vary.
The NPRM invites comments from the public regarding what, if any, changes should be made to the duties test for the white collar exemptions. In particular, the DOL asks whether employees should be required to spend a minimum portion of their time (for example, 50%) performing work that is their primary duty to qualify for exemption. Another area of concern raised by the DOL is whether the regulation permitting employees to perform both exempt and nonexempt duties during a work week should be modified. DOL also asks whether and how nondiscretionary bonuses should be considered in determining whether the minimum salary level is met.
Typically, a NPRM makes specific proposals, as the DOL did with the salary basis test. By not making any specific proposals and seeking only comments on the duties test, the DOL provides employers with only hints regarding what changes it will make to the duties test in the final regulations. This lack of specific notice may lead to litigation challenging the final rules.
The NPRM provides for a 60 day comment period. When the DOL last proposed major amendments to the FLSA's overtime regulations in 2004, more than 70,000 comments were submitted. After the close of the comment period, the DOL is expected to issue a final rule which will likely take effect in 2016.
Planning for the New Rules
Employers have some time before the new rules become effective; however, it would be prudent to begin planning for the changes now. While the potential changes to the duties test are uncertain, employers can expect the proposed indexed salary level increase to be implemented in a form similar to that in the NPRM. Employers should begin by determining how many of their exempt employees are paid less than or close to $970 per week. Employers should also assess the amount of time that exempt employees are spending on exempt vs. non-exempt work, to prepare for potential changes to the duties test.
Some employers may choose to increase employee salaries as needed to meet the new salary level. Others may reclassify some or all affected employees as non-exempt. Employees who are reclassified as non-exempt will then be subject to the same timekeeping requirements that apply to all non-exempt employees, even if the employee continues to be paid a salary. If affected employees are changed to hourly, their hourly rate can be set so that the pay for their anticipated hours will be close to their present salary. Another option may include reducing the hours of reclassified employees to ensure they do not work overtime. The possible responses will, of course, vary widely with the particular needs of each employer, but in each case the first step in creating an effective strategy will be to assess the current workforce and determine which employees might be affected.
Once the final rule is published, commentators have predicted they will become effective soon thereafter. In 2004, employers had only 120 days between publication of the final rule and the effective date of the new regulations. Many commentators expect the period will be shorter in 2016.