07.01.2015

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Updates

President Barack Obama issued a memorandum in March 2014 that directed U.S. Secretary of Labor Thomas Perez to “modernize and streamline” the regulations on exemptions from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime pay requirements. On June 30, 2015, the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking (NPRM) that would substantially narrow the scope of these exemptions, requiring the reclassification of a large number of employees.

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. A more relaxed version of these exemptions applies to certain “highly-compensated” individuals (those paid an annual salary of at least $100,000).

To be treated as exempt, employees must (1) have a “primary” job duty that qualifies for an exemption and (2) be paid on a salary basis at not less than specified minimum amounts summarized below.

On June 30, 2015, the DOL published the NPRM which seeks to revise the FLSA's executive, administrative, professional, outside sales, computer employee exemptions (also called the white collar exemptions) and the exemption for highly compensated employees.

In particular, the DOL proposes the following:

  • Increase the salary level to ensure that the FLSA’s intended overtime protections are fully implemented and simplify the identification of nonexempt employees, thus making the exemptions easier for employers and workers to understand. 
  • Automatically adjust the salary level in future years by tying it to cost-of-living increases, which DOL states is intended to prevent the salary level from becoming outdated with the often lengthy passage of time between rulemakings.
  • The DOL is also considering whether revisions to the duties tests are necessary in order to ensure that these tests fully reflect the purpose of the exemption.

Salary Requirement Increase

Currently, the salary basis test requires (with certain exceptions) that exempt employees receive at least $455 in guaranteed salary per week. This amount translates to an annual salary of $23,660. The DOL proposes to increase the weekly salary requirement equal to the 40th percentile of earnings for full-time salaried workers, which is anticipated to be $970 per week by the beginning of 2016, or $50,440 annually. For highly compensated individuals, the current compensation level is $100,000 annually, which the DOL proposes to increase to $122,148 (90th percentile of earnings for full-time salaried workers).

The DOL is also considering whether (and how) to permit non-discretionary bonuses and incentive payments to count toward a portion of the standard salary level test for the white collar exemptions.

Automatic Salary Increase

After 2016, the DOL proposes to build in annual increases to the minimum salary requirements. The DOL plans to implement automatic increases by using either a fixed percentage increase or the Consumer Price Index for All Urban Consumer (CPI-U). 

Revisions to the Duties Test

The DOL is also considering making revisions to the duties tests for each of the white collar exemptions. Possible revisions include requiring that the exempt employee perform a minimum amount of work related to his/her primary duty or limiting the amount of non-exempt work that the individual can perform. Also under consideration is the inclusion of additional examples of how the regulations play out in specific occupations.

Practical Implications

In summary, the new rules have not gone into effect yet but, when they do, the future impact will be vast. The proposed changes to the minimum salary requirement will result in extending overtime protections to millions of workers that were historically exempt. Employers will need to consider the impact that this proposal will have on their existing workforce. In doing so, employers should consult with their wage and hour counsel to review all positions that are currently treated as exempt to determine whether those positions will be affected by the proposed changes and whether any potential duties test changes could similarly impact employee status. Employers should also start to budget accordingly for salary increases and/or increased overtime costs beginning in 2016.

© 2015 Perkins Coie LLP


 

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