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Proposed Changes to Overtime Rules

President Obama has announced that he wants changes to the regulations that define which employees are exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA).

Historically, to be exempt from these requirements, an employee must satisfy two tests: (1) the employee's primary duties must involve those executive, administrative or professional duties set forth in Department of Labor regulations (so-called white collar duties), and (2) the employee must be paid on a salary basis at or above a minimum level (except for physicians, lawyers and teachers, who are exempt regardless of whether they are paid a salary or the level of that salary).

A. The Proposed New Rules

Under current regulations, the minimum salary level is $455 per week ($23,660 per year for a full-time worker). In a proposed new rule, released on June 30, 2015, the DOL proposed indexing the salary level annually at the 40th percentile of earnings for full-time salaried workers. The DOL projects the minimum to be $970 per week ($50,440 annually) in 2016.

Such a higher threshold could be significant for many industries, including health care. For example, there are many salaried managers and professionals that presently make more than $23,660 per year, but less than $50,440 per year.

In addition, some people who do not meet all of the existing white collar duties tests are still currently exempt if they make at least $100,000 per year. However, the DOL is also proposing to raise that $100,000 threshold. Under the proposed rule, the "highly compensated" employee exemption 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.

It should be remembered that so far the salary levels in the proposed rule are just that, proposals; the DOL may change the salary level in the final rule.

The proposed rule also invites comments from the public regarding if and how nondiscretionary bonuses should be considered in determining whether the minimum salary level is met.

The DOL is also considering what, if any, changes should be made to the duties test for the so-called white collar exemptions. In particular, the DOL has asked whether employees should be required to spend a minimum portion of their time (for example, 50%) performing white collar work that is their primary duty to qualify for exemption.

B. 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.

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, but those 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.

The pay of affected employees could also be changed to hourly, and their hourly rate could be set so that the pay for their anticipated overtime hours is 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, likely before the close of 2015, it will become effective soon thereafter. The last time these regulations were substantially amended, in 2004, employers had only 120 days between publication of the final rule and the effective date of the new regulations, and many commentators expect that period to be shorter in 2016.