Final Rule On FLSA White Collar Exemptions Coming

Final Rule on FLSA White Collar Exemptions Coming

On February 17, 2016, the DOL Solicitor of Labor announced that the DOL’s Final Rule regarding the Fair Labor Standards Act (FLSA) White Collar Exemption Regulations will be published in July 2016. The Solicitor noted that the Secretary of Labor would prefer to release the final rules even earlier, by “late spring.” She also indicated that, regardless of when the Final Rule is published, it will have an effective date a mere 60 days later.

Provisions of the Proposed Rule

The proposed new rule is intended to update the regulations governing which executive, administrative and professional employees (white collar workers) are entitled to FLSA’s minimum wage and overtime pay protections. Specifically, the proposed amendments are expected to be primarily focused on updating the salary and compensation levels needed for white collar workers to qualify for exemption (the Solicitor emphasized this point in her February 17th announcement).

Specific proposals include:

  • Set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers ($921 per week, or $47,892 annually). This would be more than double the current salary threshold for exemption, which is $455 per week, or $23,660 per year.
  • 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 salaries workers ($122,148 annually).
  • 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.

The DOL has stated its intentions for creating these amendments are to (1) “minimize the risk that employees legally entitled to overtime will be subject to misclassification based solely on the salaries they receive, without excluding from exemption an unacceptably high number of employees who meet the duties test;” and (2) ensure that the standard salary and HCE total annual compensation requirements remain meaningful tests for distinguishing between bona fide executive, administrative, and professional workers who are not entitled to overtime and overtime-protected white collar workers.

Notably, on February 9, 2016, over 100 members of the US House of Representatives signed a letter to the Secretary of Labor expressing concern, specifically, with the proposed Rule’s ambiguity as to any proposed changes to the duties requirements and requesting that the DOL “reconsider moving forward with this rule as drafted.” Though not mentioned in the letter, Congress could attempt to utilize a Congressional Review Act challenge to the Final Rule, if it is dissatisfied with the rule.

What Employers Need to Know, and Do, NOW

Even if Congress challenges the Final Rule, it is clear that a new Final Rule is coming and will have an extremely short window between announcement and implementation/enforcement. It is also clear that the Final Rule will be vigorously enforced. Employers must begin preparing themselves now, as the Final Rule will undoubtedly result in a substantial increase in non-exempt workers, wage and hour litigation, and compliance related issues.

Once the Final Rule is announced, employers will need to respond quickly – potentially creating budgetary and operational concerns. Possible employer responses will likely include:

  • Significant increases in salary to maintain exempt status;
  • Reclassifying employees to nonexempt status;
  • Modifying job duties and position descriptions to comply with any changes to the “duties” tests;
  • Changing work-hour and scheduling requirements to eliminate overtime;
  • Adjusting to timekeeping requirements for historically exempt employees;
  • Restructuring bonus and incentive pay; and
  • Managing employee responses concerning such changes.

Though the exact contents of the Final Rule are not known, early planning is critical – particularly in light of the anticipated small window of time between the announcement of the Final Rule and the date on which that Rule will go into effect. Employers should consult with experienced labor counsel now to determine which policies and procedures are likely to be affected by the new rule. Employers should also consult with and warn accounting staff now to analyze possible changes to compensation structures, and begin planning whether the preferred strategy will be, for example, to increase salaries or reclassify employees.

In any event, employers must be aware that these changes to the law are coming and will almost certainly be in effect before the end of 2016. Aggressive enforcement is anticipated by the DOL. As a result, employers will not have much time after the announcement of the rule to analyze and modify their policies, procedures, job descriptions/duties, and compensation structures before the rule will be in effect. Employers would, therefore, be wise to proactively prepare for this new rule immediately and consult with experienced labor counsel in doing so. Otherwise, a wait-and-see approach, in this instance, may cause employers to find themselves quickly embroiled in costly litigation and/or agency investigations.

Contributor:  Melissa M. Whitehead, Attorney at Law  |  Weintraub Tobin