Today, the U.S. Department of Labor (DOL) proposed significant changes to the federal overtime regulations. The Proposed Rules are in response to a March 2014 order from President Obama, which directed the DOL to overhaul its overtime regulations.
The new Proposed Rules more than double the salary basis needed to qualify for one of the white collar exemptions (administrative, executive, professional), from $455 a week ($23,660 a year) to $970 a week ($50,440 a year) in 2016. The Proposed Rules also seek to establish a mechanism for automatically updating the salary and compensation levels annually, to prevent the level from becoming outdated with the often lengthy passage of time between rulemakings.
In its Proposed Rules, the DOL also solicits comments regarding the current “duties test” framework and the possibility of including nondiscretionary bonuses to satisfy a portion of the standard salary requirement.
Key Provisions
While we are still reviewing the nearly 300 pages of proposed regulations, the Proposed Rules focus primarily on updating the salary and compensation levels needed for white collar workers to be exempt.
Specifically, the DOL proposes to:
- Set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers (which, in 2013, was $921 per week, or $47,892 annually);
- Increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers ($122,148 annually); and
- Establish a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption.
According to the DOL’s calculations, the 40th percentile of weekly earnings will be $970 a week ($50,440 a year) in 2016. Thus, the Proposed Rules establish $970 per week as the initial salary basis, but would automatically update the salary and compensation thresholds on an annual basis using either a fixed percentile of wages or the Consumer Price Index (CPI-U).
To be exempt, employees would still need to satisfy the “duties test,” which the DOL does not change (at least yet). Instead, the DOL solicits comments regarding the current “duties test” framework and the possibility of including nondiscretionary bonuses to satisfy a portion of the standard salary requirement.
Bottom Line
The Proposed Rules will undoubtedly make it more difficult for employees to qualify for any of the FLSA’s white-collar exemptions. Indeed, by the DOL’s own calculation, more than 4.6 million workers who are currently classified as “exempt,” will no longer be exempt under the Proposed Rules.
While the Proposed Rules still need to go through the notice and comment period before final regulations are promulgated, employers would be wise to begin reviewing their payrolls to determine whether the exemption status of any of its employees may be affected if the Proposed Rules are eventually adopted.
We will continue to monitor this story as it develops.