Department of Labor Announces Proposal To More Than Double Salary Required To Be Classified As An Exempt Employee
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Department of Labor Announces Proposal To More Than Double Salary Required To Be Classified As An Exempt Employee
June 30, 2015
On June 30, 2015, the United States Department of Labor (“DOL”) posted on its website a Notice of Proposed Rulemaking that would more than double the minimum salary required in order for an employee to be classified as “exempt” from the overtime provisions of the Fair Labor Standards Act (“FLSA”).[1] Based on the DOL’s own statistics, approximately 22 percent of the workforce that is currently classified as exempt would have to either be re-classified as non-exempt (i.e., they would become eligible to receive overtime), or their base salary would have to be increased to meet the increased salary requirements.
THE CURRENT LAW
Under the FLSA, employees are required to be paid overtime for all hours actually worked in excess of 40 hours per week, unless the employee is “exempt” from the overtime provisions of the Act. The three most common exemptions are the Executive, Administrative, and Professional Employee exemptions, which are commonly referred to as the “white collar” exemptions. Currently, in order to qualify for any of these three exemptions, three requirements apply: 1) the employee must be paid a minimum salary of at least $455 per week ($23,660 per year); 2) with very few, narrow exceptions, the salary cannot be reduced based on the quality or quantity of work performed; and 3) the employee’s work responsibilities must meet the criteria of the “duties” tests that are established for each of the white collar exemptions.
THE PROPOSED CHANGES
The DOL proposes changes and seeks public comment on the following issues:
1. The DOL seeks to increase the minimum salary required for the white collar exemptions from $455/week to $921/week. This salary was based on the current 40th percentile wage for the entire, nationwide, salaried workforce (including salaried exempt and salaried non-exempt employees).
Note that the government has issued conflicting information regarding the proposed new salary level. The DOL issued a press release, and President Obama wrote an editorial in the Huffington Post, announcing a new salary level of $50,440/year, or $970/week. However, the Notice of Proposed Rulemaking, which is the official document, lists a salary level of $921/week, or $47,892/year. This difference may be the result of different 40th percentile levels at the time the Notice was first prepared, as compared to the anticipated level in 2016 when the proposed rule is likely to become effective.
2. The DOL seeks to increase the salary threshold for “highly compensated employees” from $100,000 per year to $122,148 per year.
3. The DOL seeks to automatically increase the minimum salary requirement on an annual basis, without any future rulemaking. To accomplish this, the DOL is considering two alternatives. The first alternative is to annually update the salary requirement to maintain the 40th percentile measurement. The second alternative is to index the minimum salary to the cost of living as measured by the national CPI-U.
Notably, indexing the salary basis test to the 40th percentile could have severe, unintended consequences. Mathematically speaking, there is a significant risk that the 40th percentile salary might increase dramatically in future years. The problem is that many employers will choose to either: 1) reclassify their lower-paid, salaried, exempt employees as hourly, non-exempt employees; or 2) increase the salary of the salaried, exempt employees to meet the new threshold. If employers reclassify workers as hourly employees, the net effect will be that only the higher-paid employees will remain in the pool of “salaried” employees that are used to determine the 40th percentile. Thus, the minimum salary will be driven further up, and the cycle will repeat itself. Similarly, if employers increase the salary of their exempt employees to meet the new threshold, the 40th percentile range will also be increased. This, too, could result in sizeable, cyclical increases.
Public sector employers and contractors are quite familiar with this concept as a result of the Prevailing Wage Act. Data shows that increases to the prevailing wages required on public works projects have outpaced the cost-of-living increases by double-digit margins.
4. The DOL seeks comments from the public on whether non-discretionary bonuses should be included in the calculation of an employee’s annual salary.
5. The DOL seeks comments from the public on whether the regulations should list additional, specific examples of exempt and non-exempt positions.
6. The DOL seeks comments from the public on whether the “duties” tests should be amended. The DOL does not propose any specific amendments to the duties tests at this point in time, but raises the following, specific inquiries:
a. What, if any, changes should be made to the duties tests?
b. Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?
c. Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model? If some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?
d. Does the single standard duties test for each exemption category appropriately distinguish between exempt and non-exempt employees? Should the Department reconsider its decision to eliminate the long/short duties tests structure?
e. Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and non-exempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of non-exempt work? To what extent are exempt lower-level executive employees performing non-exempt work?
The full text of the Notice of Proposed Rulemaking is 295 pages long. A full copy of the Notice is available on the DOL website.
WHAT SHOULD EMPLOYERS DO?
Employers should strongly consider taking the following action:
1. Identify all of your exempt employees and determine whether those employees would meet the new, increased salary basis test of $921 per week ($47,892 per year).
2. If an employee does not meet the increased salary basis test, begin to plan your strategy if the proposed rule becomes a final rule. Options to consider include:
a. Increase the employee’s salary to meet the new minimum.
b. Plan to convert the employee to a non-exempt position.
i. If the plan is to convert the employee to a non-exempt position, consider restructuring the employee’s pay so that the employee is paid on an hourly basis instead of a salary basis.
ii. If the plan is to convert the employee to a non-exempt position, consider reallocating responsibilities to minimize the amount of overtime that will be paid.
iii. If the plan is to convert the employee to a non-exempt position, but overtime will be required, consider adjusting the hourly rate of pay so as to minimize the impact of the new overtime costs.
iv. If the plan is to convert the employee to a non-exempt position (either hourly or salaried), review your benefit plans to determine what secondary effects the change might have on the employees’ eligibility for those benefits.
3. The employer’s budget should be re-examined to ensure funding is available to cover potential cost increases.
4. If you have not already done so, employers should use this Notice period as an opportunity to conduct a legal review of employees’ job responsibilities to ensure that the employees are properly classified as “exempt” under both the duties test and the salary basis test. A legal review could help provide a “good faith” defense to some forms of damages in wage-and-hour litigation.
5. If the employer has strong feelings about the Proposed Rule, the employer may want to submit comments to the DOL. Comments will need to be submitted within 60 days of the date that the Notice is published in the Federal Register. Assuming the notice is published today, comments would be due no later than 11:59 p.m. Eastern Time on August 29, 2015.
If you have any questions about how the Notice of Proposed Rulemaking may affect you, or if you would like assistance submitting comments to the DOL or conducting an exempt-status audit to help verify compliance with the law, please contact any of the attorneys at Clark Baird Smith LLP.
[1] The rule has not yet been published in the Federal Register, but the DOL notes that the Notice has already been approved by the Office of Management and Budget and will be published in the Federal Register with only minor formatting changes.
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