Since 1938, the Fair Labor Standards Act (“FLSA”) has set the federal minimum wage and mandated overtime pay (time and a half) for employees who work over 40 hours during a 7-day period. The FLSA exempts employees from the minimum wage and overtime requirements if they are:
(1) paid a fixed salary (the “salary basis test”);
(2) paid at least the minimum salary (the “salary level test”); and
(3) assigned certain job duties and responsibilities (the “duties test”), including the so-called “white collar” exemptions for executive, administrative and professional employees.
The minimum salary for exempt status (last updated in 2004) is currently $455 per week (or $23,660 per year). Over the past decade, more salaried employees have exceeded this threshold and have become potentially exempt. In March of 2014, President Obama issued a memo directing the secretary of labor to begin the process of changing the exemption rules and “modernizing and streamlining” the existing overtime regulations. Yesterday, the Department of Labor issued a 300-page Notice of Proposed Rulemaking (NPRM) detailing the new proposed rules. The new proposal is expected to have a significant impact on businesses, employees, and the US economy.
Highlights of the Proposed Rulemaking
the salary ceiling under which employees are guaranteed overtime pay is expected to double next year, then continue to increase if wages or prices rise.
The proposed rule would increase the salary threshold and significantly reduce the number of exempt employees. For the first time, the DOL would no longer rely on a static minimum salary. Instead, the proposal sets the threshold at the 40th percentile of earnings for full-time salaried workers. In order to keep the salary threshold current, DOL has proposed a mechanism to automatically update the salary threshold each year, using either a fixed percentile of wages for that year, or the consumer price index.
At the time the rule would become final in 2016, the minimum salary is projected to be $970 per week (or $50,440 per year). In short: the salary ceiling under which employees are guaranteed overtime pay is expected to double next year, then continue to increase if wages or prices rise.
What about the Duties Test?
The DOL has stated that increasing the salary threshold, with annual updating, as the simplest method to ensure that employees are classified properly. Therefore, the DOL has not proposed any changes to the duties test. However, the proposal invites interested parties to comment on whether the current duties test is effectively screening out employees (at any salary) who are not truly performing white collar work. Depending on the outcome of the notice and comment process, changes could still be made to the duties test.
The DOL expects to officially publish the proposal in the Federal Register on July 6th. Once it is officially published, the public and interested groups will have 60 days to comment. Given the potential impact of this change for employers of all types (for example, small businesses with first-line managers who make less than $50,000) the business community is expected to vigorously challenge the proposal. Commentators believe that the final rule could be announced in the first half of 2016, and may go into effect before the 2016 election.
Potential Impact on Employers
Under this proposal, the DOL estimates that 4.6 million currently exempt salaried employees will become eligible for overtime for the first time. If those newly non-exempt employees work over 40 hours per week, employers will be faced with three choices: begin paying them overtime, limit their hours to 40 hours per week (and hire other workers to cover the shortfall), or increase their salaries above the new threshold.
Regardless of what changes are ultimately made, employers who misclassify workers as exempt risk a DOL audit and substantial penalties. Periodic self-audits are a good way for employers to correct and avoid misclassifications. The upcoming changes provide an opportunity to re-examine how your employees are classified, without the appearance that the audit is in response to past missteps.
Stay tuned — HR Legalist will continue to track this proposal in the months ahead.