Proposed Rule Changing Overtime Regulations Is Issued by DOL

On July 6, 2015, the federal Department of Labor (DOL) published in the Federal Register a Notice of Proposed Rulemaking (NPRM) announcing proposed changes to the overtime pay regulations under the Fair Labor Standards Act (FLSA) to increase the salary threshold for “white collar” exemptions from the current level of $23,660 per year to $50,440 per year in 2016.

Salary Threshold for Exemption to Rise.  The proposed rule is the result of nearly 16 months of work by the DOL following President Obama’s March 13, 2014 directive to the Secretary of Labor to “modernize and streamline” the current overtime regulations for white collar employees – generally, executive, administrative, and professional employees. The DOL last updated the white collar overtime regulations in 2004, and that update raised the minimum salary threshold for exemption to the current threshold of $455 per week, $23,660 per year. The proposed rule would set the threshold at the 40th percentile of earnings for full-time salaried workers. That amount is currently $921 per week, $47,892 per year, and the DOL expects it to be $970 per week, $50,440 per year, in 2016 when the final rule will be issued. 

Under the FLSA, an employee must be paid at least the minimum salary threshold on a salary basis and must meet certain job duties tests in order to be exempt from minimum wage and overtime. If an employee is not exempt, either because he is not paid the requisite amount on a salary basis or does not satisfy the duties test for a particular exemption, he must receive overtime pay at the rate of one and one-half times his regular rate of pay for every hour over 40 in a particular workweek.

The DOL states that increasing the salary threshold to the 40th percentile of earnings for full-time salaried workers is appropriate “because the current salary level is only screening from exemption approximately 15% of overtime-eligible white collar salaried employees,” and, thus, the current salary level is “not an effective test for exemption and does not serve the intended purpose of simplifying application of the exemption by reducing the number of employees for whom employers must perform a duties analysis.” (U.S. Department of Labor, Wage and Hour Division, Frequently Asked Questions: Overtime NPRM.) In addition to proposing an increase in the standard salary level, the DOL is also proposing an increase in the annual compensation level required for exemption as a “highly compensated employee.” That level, currently $100,000 per year, would increase to a level equal to the 90th percentile of earnings for a full-time salaried worker, currently $122,148 annually. 

DOL Seeks Comments on Additional Changes.  The DOL is seeking comment on whether to allow non-discretionary bonuses to satisfy a portion of the standard salary test requirement. The DOL is also seeking comment on how best to update the salary level and the highly compensated employee total annual compensation level automatically each year. Two different methodologies are proposed for such updates. One would keep the amounts tied to the 40th and 90th percentiles of earnings for full-time salaried workers, respectively. The other would adjust the amounts based on changes in inflation as measured by the consumer price index. Notably, although the DOL did not propose changes to the “duties tests” in the NPRM, it is seeking comment on “whether the standard duties tests are working as intended to screen out employees who are not bona fide white collar exempt employees.” (U.S. Department of Labor, Wage and Hour Division, Frequently Asked Questions: Overtime NPRM.)  A number of commentators have expressed concern that the DOL may include changes to the duties tests in the final rule that the public will not have been given an opportunity to comment on prior to publication of the final rule.

What To Do Now.  Employers should begin analysis of how the increased salary threshold will affect their current classification of employees as exempt or non-exempt. Some employees may need to be given a salary increase in order to remain exempt and some employees may need to be re-classified as non-exempt. 

The NPRM is subject to a 60-day public comment period. Interested employers or trade associations should provide their written comments before the deadline of September 4, 2015. Comments may be submitted at www.regulations.gov. Following the comment period, the DOL will issue a final rule which must be reviewed by the Office of Management and Budget prior to publication. The final rule is expected to become effective in mid-2016.