By: Jason E. Reisman, Blank Rome LLP
Today, the U.S. Department of Labor finally issued its much-anticipated proposed update to the regulations governing the “white collar exemptions” (those for executive, administrative, and professional employees) under the Fair Labor Standards Act. The last changes to the regulations occurred in 2004. With this latest update, explained in just under 300 pages in the Notice of Proposed Rulemaking (NPRM), the DOL’s key focus is on increasing the minimum salary threshold required to meet the exemptions. (If you are interested in reading more detail or 300 pages of “fun,” surf to the DOL’s announcement page here.)
Effort to Provide Overtime Pay to 5 Million More Workers
Although we have not yet parsed through the full NPRM, it is clear that the DOL has taken President Obama’s instructions to heart and sought to broaden the federal overtime pay requirements to cover an estimated 5 million additional workers in the U.S. The primary method for this expansion comes through raising the minimum salary level required to meet the applicable white collar exemption tests. To meet one of these exemptions, an employee must be paid at least the minimum salary, be paid on a salary basis, and primarily perform certain job-related duties. The DOL does not appear to have proposed any material changes to the salary basis requirements or duties tests for the exemptions.
Minimum Salary Hike to $970 a Week in 2016
Since 2004, the minimum required salary has been $455 per week (or $23,660 annually). The proposed rule would increase that amount to what is expected to be $970 per week in 2016 (or $50,440 annually). The DOL is setting the salary threshold to be equal to the 40th percentile of weekly earnings for full-time salaried workers. The DOL’s logic behind the substantial increase is that too many white collar salaried workers (85%) get paid at least $455 per week yet fail to meet the duties tests to be exempt. That means, in the DOL’s view, that the current salary level is only screening from exemption approximately 15% of overtime-eligible white collar salaried employees. By changing the salary level as proposed, the DOL states that it would screen out an additional approximately 44% of overtime-eligible white collar salaried employees. By enhancing the effective screening ability of the salary threshold, the DOL believes there will be less pressure on the duties test and also avoid a return to the more detailed “long” duties test that existed before 2004.
Additionally, the DOL is seeking to ensure that the salary threshold remains meaningful and grows over time by establishing a mechanism for automatic updates to the standard salary level. The DOL has suggested two different methods for this updating mechanism (one continually tied to the 40th percentile noted above and the other tied to inflation) and seeks public comment on both.
Duties Test – No Changes Right Now, But…
Although no direct changes to the duties tests are proposed, the DOL is seeking comments on the current requirements and whether they are working as intended to screen out employees who are not bona fide white collar exempt employees. So, there certainly could be potential changes in the works. Only time will tell. The comment period will be open for 60 days following the official publication of the proposed rule in the Federal Register.
Don’t Wait – Think Now!
Regardless of whether the proposed new rule goes into place exactly as laid out in the DOL’s NPRM, this is a call to all employers to begin (if you have not already) thinking about the impact on your workforce and where you may need to re-evaluate and re-classify. There’s no better time than with newly issued, or even proposed, regulations to evaluate and plan the implementation of any needed re-classifications. You can “blame” the re-classifications on the new regulations, rather than admitting to any prior misclassification.
Check back soon for more detailed information and updates on the DOL’s efforts!