Significant Changes to Federal Overtime Regulations: What Employers Should Expect in the Wake of the DOL’s Proposed Rule

Introduction 

On July 6, 2015, in response to a presidential memorandum directing revisions to “modernize and streamline” the existing federal overtime regulations, the U.S. Department of Labor (“DOL”) published a Notice of Proposed Rulemaking (“NPRM”) proposing changes to these regulations. The NPRM invited interested parties to submit written comments on the proposed rule on or before September 4, 2015. With this proposed rule, the DOL “seeks to update the salary level required for exemption to ensure that intended overtime protections are fully implemented, and to simplify the identification of nonexempt employees, thus making the executive, administrative and professional employee exemptions easier for employers and workers to understand and apply.”^[1] Although the DOL has not yet published its final rule and the full extent of the changes are not yet known, employers should begin to prepare for the new rule to take effect, likely later in 2016. 

Current Regulations 

The Fair Labor Standards Act (“FLSA”) currently guarantees a minimum wage and overtime pay for hours worked over 40 in a workweek. While these protections extend to most workers, the FLSA does provide a number of exemptions, including the so-called “white collar” exemptions. Generally, each of three requirements must be met for one of the FLSA’s white collar exemptions to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid must meet a minimum specified amount; and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations. The third prong of the test, often called the “duties” test, requires the employee to perform certain enumerated duties rising to the level of a bona fide administrative, executive or professional employee as defined in the regulations, and imposes a relatively high threshold to qualify for the exemptions. 

The standard salary level required for exemption is currently $455 a week ($23,660 for a full-year worker) and was last updated in 2004. Therefore, an employee who currently meets the required duties test and who is paid a salary of at least $455 per week ($23,660 per year) may properly be classified as exempt – thus alleviating the requirement for overtime pay. Under the current regulations, certain highly-compensated employees are also exempt from the overtime pay requirement if they are paid total annual compensation of at least $100,000 (which must include at least $455 per week paid on a salary or fee basis) and if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption. 

Proposed Changes

The NPRM focuses primarily on updating the salary and compensation levels needed for white collar workers to be exempt. Specifically, the Department proposes to increase the minimum salary level from $455 to $921 per week, or $47,892 annually. According to the DOL, this salary level represents the 40th percentile of weekly earnings for full-time salaried workers in the United States, a threshold which the DOL believes to be more in line with the purpose of the FLSA exemptions. Under the proposed rule, the DOL would also establish a mechanism for automatically updating the salary and compensation levels going forward. In addition, the DOL proposes to increase the total annual compensation requirement needed to exempt highly-compensated workers from $100,000 annually to $122,148 annually, which represents the top tenth of U.S. workers. 

Interestingly, although the current regulations do not allow employers to count non-discretionary bonuses towards reaching the minimum salary threshold, the DOL is now considering whether to also permit non-discretionary bonuses and incentive payments to count toward a portion of the standard salary level test for the executive, administrative, and professional exemptions. 

As proposed, the new rules will not impact the existing duties test, as the DOL has chosen to focus instead on raising the minimum salary requirements. However, the DOL requested comments on whether and how to modify the duties test in the future. Currently, exempt employees must perform certain specified exempt duties as their “primary duty,” meaning the principal, main, major or most important duty that the employee performs. Included in the DOL’s request for comments was a question regarding whether exempt employees should be required to spend a specified percentage of time performing their primary duty (such as by mirroring the 50 percent primary duty requirement imposed by California law). This request indicates that, while changes to the duties test and “primary duty” requirement are not proposed in the new rule, such changes may be coming in the near future.

Potential Impact for Employers

If the changes to overtime regulations are implemented as proposed in the NPRM, the changes to the salary basis threshold are anticipated to affect the pay and exemption status of approximately 5 million workers. Specifically, if the minimum salary threshold is increased to just under $50,000 per year, employees who are paid less than this minimum salary annually will no longer qualify for the exemption and will be entitled to overtime under the FLSA. Therefore, positions that currently are properly classified as exempt but that are paid less than the proposed minimum salary of approximately $50,000 per year will no longer be properly exempt if the proposed changes are implemented. One caveat, however, is that, if the DOL does begin allowing non-discretionary bonuses to count towards the minimum salary threshold, employees whose non-discretionary bonuses bring their total annual compensation to at least the new minimum may be properly exempt. 

Employers should also keep in mind that, if the changes are implemented as proposed, any employees currently relying on the highly-compensated employee exemption will no longer qualify under the proposed rule unless they are paid at least $122,148 annually. For the purpose of the highly-compensated employee exemption, you may currently include non-discretionary bonuses towards the minimum annual compensation. The NPRM does not include any proposed changes to employers’ ability to include non-discretionary bonuses in this calculation.

Conclusion 

In sum, although the proposed changes to the overtime exemption have not yet taken effect, there likely will be a significant impact on employers’ classification of exempt employees if and when the changes are implemented. Therefore, now is an excellent time for employers to conduct an internal audit of their employment practices and prepare for the proposed changes. Employers should consider conducting such an audit to determine (1) whether any employees are improperly classified as exempt employees in light of the FLSA’s duties tests; and (2) whether any properly-exempt employees are paid less than the proposed higher salary minimum. We suggest a re-evaluation of exempt positions in general, since now is an ideal time to transition any improperly classified employees to non-exempt status. Furthermore, assessing which properly exempt employees will be affected by the proposed changes allows employers to better prepare for the changes and how to implement them. Specifically, determining which exempt employees are currently paid less than the proposed salary threshold allows employers to begin planning whether these employees will be transitioned to non-exempt status (which will require overtime pay for any hours over 40 worked in a workweek) or will be paid a higher salary to meet the new threshold as set forth in the NPRM. Employers should take these preliminary planning steps now to ensure the proper classification of their workers under the current regulations and to prepare to implement changes to comply with the upcoming changes in the regulations.

About the Authors 

As attorneys in the Labor & Employment practice at Williams Mullen, Earl Baggett and Amanda Weaver routinely advise employers on various state and federal laws, including the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act and the Family Medical Leave Act. They also regularly provide ongoing counseling in all areas of human resource management, including employment agreements, employment handbooks, covenants not to compete, personnel practices and I-9 compliance issues. They can be reached at ebaggett@williamsmullen.com ebaggett@williamsmullen.comand aweaver@williamsmullen.com, respectively.

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