Last week, after more than a year of anticipation, the Department of Labor (“DOL”) published its proposed changes to federal overtime laws that will more than double the minimum salary required to classify many employees as exempt. In a Notice of Proposed Rulemaking (“NPRM”), the DOL proposed to increase the minimum salary for “white collar” exemptions from its current $455 per week ($23,660 per year) to $970 per week ($50,440 per year). If enacted, the new law could affect nearly 11 million employees who are currently classified as exempt. That number is not limited to employees in states such as Texas, Florida, and Georgia, which already follow the FLSA, but will include employees in New York and California, which have more employee-friendly overtime laws than those in place under the current FLSA.
Brief Recap of Current Overtime Laws.
Under the Fair Labor Standards Act (“FLSA”), employers are generally required to pay employees a minimum wage of at least $7.25 per hour and an overtime premium of at least 1.5 times their regular rate for each hour worked in excess of forty hours per workweek. But certain groups of employees are exempt from the overtime requirements, the most common of which are employees working jobs the FLSA classifies as executive, administrative, and professional (“white collar” workers). To be classified under one of these categories, employees must satisfy the “duties test,” meaning they primarily perform executive, administrative, or professional duties and a meet a minimum salary threshold (currently $455 per week).
The DOL’s Proposed Changes
The FLSA’s overtime rules were last updated in 2004. According to the Obama administration, that was too long ago. In March 2014, President Obama issued a presidential memorandum directing the Secretary of Labor to overhaul the overtime rules for workers currently classified as exempt while earning salaries close to the minimum threshold. The NPRM reflects the DOL’s response.
The most glaring proposed change involves the raise to the minimum salary threshold. The proposed raise to $970 per week represents the 40th percentile of current weekly earnings for full-time salaried employees. According to a Frequently Asked Questions document released with the NPRM, the DOL believes the 40th percentile “represents the most appropriate line of demarcation between exempt and nonexempt employees.”
In addition, the NPRM proposes to increase the minimum salary for the “highly compensated employee” exemption from $100,000 to at least $122,148. This exemption applies to employees who make the minimum required salary and “customarily and regularly” perform one or more of the exempt duties of an executive, administrative, or professional employee. The proposed raise to $122,148 reflects the 90th percentile of current weekly earnings for full-time salaried employees.
Finally, the NPRM proposes a mechanism to automatically update the minimum salary thresholds annually. One proposed method of doing so is to tie the number to an annual percentile (such as 40th and 90th). This proposed change is designed to prevent the salaries from again becoming outdated, as the Obama administration currently believes them to be.
At this time, the NPRM does not propose any additional changes, which is somewhat of a surprise. Prior to the announcement, many speculated that the revised regulations might alter the duties test applicable to the white collar exemptions. That test currently analyzes an employee’s primary duties in deciding whether the exemption applies. There was some belief that the new regulations might instead adopt a test similar to the one California uses—requiring that the employee spend a specified minimum amount of time each day performing exempt duties (e.g., 50%).
According to the Frequently Asked Questions, the DOL believes the changes to the minimum salary threshold should eliminate the need for any changes to the duties test. But that could change. The DOL has invited comments on whether any changes to the duties test should be adopted, and whether non-discretionary bonuses should be counted toward meeting the minimum salary thresholds.
How Employers Are Affected
The proposed new threshold is particularly noteworthy for employers in New York, which currently has more generous minimum thresholds to meet the exemptions ($656.25 per week). When employers are faced with both state and federal laws governing the employment relationship, they must apply the laws that are more favorable to the employee. Because New York state laws are more employee-friendly, employers in New York currently pay little mind to the FLSA. Under the proposed changes, these employers would now need to ensure compliance with the federal regulations instead.
Employers in more rural states and places with lower costs of living will be more significantly impacted by these proposed changes as well. The jump from $23,660 per year to $50,440 per year may cause many employers to reclassify several exempt positions rather than absorb substantial new payroll costs.
If the rules are adopted, employers will have to decide whether to raise salaries or reclassify employees as non-exempt and pay them overtime. Either approach figures to be costly. Employers may have to offset these increased costs by reducing employees’ hours, wages, and/or bonuses. This could in turn adversely impact employees in many ways. In addition to receiving less income, employees who are stripped of the exempt classification will lose the freedom and flexibility the classification affords. On the other hand, the increased minimum salary threshold could potentially eliminate much of the litigation over exempt classifications. So at least there is that.
What Happens Next
At this point, the NPRM is only a proposal. The next step is a public comment period, which remains open until September 4, 2015. The DOL must analyze and respond to all public comments it receives before issuing a final rule. That will likely come sometime in 2016. In the meantime, employers should consider commenting during the public comment period. In particular, employers should wish to avoid any possible changes to the duties test. Employers should also begin considering the ramifications of the proposed rule changes now. Employers should review current classifications and determine whether it makes sense to reclassify certain positions, increase salaries, or take additional measures to offset the increased labor costs. While there is still some time before the proposed rules become official, there is not likely to be a long grace period once they are enacted before employers must comply.
Lukas Clary, Attorney at Law | Weintraub Tobin