While the changes are proposed at this point, employers should begin to prepare for their eventual implementation in some form.
On June 30, the U.S. Dept. of Labor (DOL) published its long-awaited, proposed changes to the Fair Labor Standards Act (FLSA) overtime regulations. The proposed amendments are designed to follow President Obama’s directive to “modernize and streamline” the regulations in order to increase the number of individuals entitled to overtime. (President Obama’s Memorandum to Secretary of Labor Thomas Perez, press release, March 13, 2014.) While there has been much speculation about the many different and complex ways that the DOL could accomplish this task, the DOL ultimately focused on the salary thresholds applicable to the executive, administrative, professional, computer-related and highly-compensated exemptions. However, the DOL has signaled that it may not stop there.
The FLSA requires employers to pay their employees one-and-one-half times their regular hourly wages for all hours worked over 40 in a given work week, unless the employee is classified as “exempt.” The so-called “white collar exemptions” are categorized as executive, administrative, professional, computer-related and highly-compensated exemptions. To qualify for one of these exemptions, an employee must generally satisfy two tests: a salary test and a duties test. The salary test involves, in part, that the employee is paid a weekly salary above a minimum threshold level. The duties test involves analyzing the employee’s job responsibilities and tasks to ensure that they primarily involve executive, administrative, professional, etc. duties as defined by the regulations.
Under the current regulations (set in 2004), an executive, administrative, or professional employee must be paid at least $455 per week ($23,660 per year for a full-year worker) in order to come within the standard exemption; in order to come within the exemption for highly-compensated employees (HCE), such an employee must earn at least $100,000 in total annual compensation. Computer systems analysts, computer programmers, software engineers, and similarly-skilled professional workers, including those paid on an hourly basis are also considered exempt if they are paid at least $27.63 an hour.
The proposed amendments to these regulations would increase the thresholds for executive, administrative, professional and computer-related exemptions to an estimated $970 per week in 2016. The HCE exemption would be increased to an estimated to $122,148 annually. In addition, the DOL is proposing to include in the regulations a mechanism to automatically update these salary thresholds on an annual basis using either a fixed percentile of wages or the consumer price index. In other words, the salary thresholds would likely increase each year should the regulations go into effect unchanged.
In addition, the DOL has requested that during the comment period for these new proposed rules that commenters provide suggestions for possible revisions to the current duties tests. Moreover, the DOL is seeking comments on the possibility of including nondiscretionary bonuses to satisfy a portion of the standard salary requirement. In other words, while the DOL is not proposing specific regulatory changes on either of these issues, it is a safe bet that such changes will be considered in the future.
It is important to remember that the changes are only proposed at this point and could easily change substantially before being implemented. There will be a lengthy comment period, possible revisions to the proposed regulations based on those comments, a notice of a final rulemaking, potential legal challenges, etc. In fact, the 2004 amendments took more than 18 months to implement, from when the DOL issued its notice of proposed rulemaking until the actual implementation of the final rule. If it takes a similar amount of time to implement these new rules, they would not become effective until after the next presidential election; which could also have an impact on the final rule.
Nevertheless, employers should begin to prepare for the probability that the number of employees who can be classified as exempt from overtime will decline. At a minimum, they should consider the following:
- Calculating the payroll expenses associated with giving additional overtime;
- Developing strategies for restricting overtime work or otherwise containing those expenses;
- Evaluating the pros and cons of increasing salaries to meet the new thresholds versus paying formerly exempt employees on an hourly basis (perhaps adjusting those hourly rates to approximate former salary); and
- Developing contingency plans for keeping track of the time worked by formerly exempt employees.
If you have any questions regarding the foregoing or need assistance in preparing for possible changes to the overtime rules, feel free to contact our office.
Michael L. Dodd
Ferrara Fiorenza PC (PIA Association Counsel)