Dol Issues Long-Awaited Proposed Changes To Flsa Exemptions

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As if employers did not already have enough on their to-do list after the past week’s Supreme Court rulings, yesterday the U.S. Department of Labor (“DOL”) published on its website proposed regulations¹ that would radically change the minimum salary necessary to qualify for minimum wage and overtime exemptions under the Fair Labor Standards Act (“FLSA”). If DOL’s proposed regulations become final, they would more than double the minimum salary necessary to qualify for an exemption from the current $455 per week ($23,660 per year) to approximately $970 per week ($50,440 per year). We say “approximately,” here, because DOL also proposes to adjust that number annually based on a measure of inflation and wage fluctuation such as using the 40th percentile of average weekly wage data for full-time salaried employees from the Bureau of Labor Statistics (“BLS”) or a similar method that incorporates the Consumer Price Index. We caution that these are not final regulations, but rather DOL’s first draft offered for public comment. Still, employers should act quickly to meet with stakeholders throughout their organizations to determine how the proposed regulations might affect their workplace.

Summary of Key Proposals

Under current FLSA rules, in order to qualify for the typical exemption from the FLSA’s mandated minimum wage and overtime requirements, an employee generally must satisfy both the minimum salary test and the applicable duties test. For example, in order to qualify for an executive exemption, the employer must show that an employee has a minimum salary of $455 per week² and that the employee (1) has a primary duty of managing, (2) customarily and regularly directs the work of two or more full-time equivalent employees, and (3) has the authority to hire and fire or to make recommendations concerning ultimate employment decisions that are given particular weight. The duties test differs for each type of FLSA exemption. The same salary test applies to all of the white collar exemptions (executive, administrative, professional, and computer employee), except for the outside sales exemption, which has no minimum salary test.

Noting that a salary of $455 per week is below the current federal poverty level for a family of four, DOL has taken the position that a salary of $455 per week is simply too low to justify exempt status. The last time DOL increased the minimum salary threshold was in 2004. If the original 1975 salary test were adjusted to account for inflation, today’s salary test would be $1,083 per week.

DOL has proposed annually establishing the minimum salary necessary for the white collar exemptions using BLS data for the 40th percentile of average weekly wages for full-time salaried employees. As of June 2015, using current BLS data, the minimum salary to qualify for any of these exemptions is projected to be $970 per week. DOL has also requested comments on whether it should allow employers to include nondiscretionary bonuses and incentive pay as part of an employee’s minimum salary calculation. Under existing FLSA regulations, only an employee’s base salary may be considered for the $455 minimum salary test, excluding employers from considering bonus or incentive pay in order to satisfy the test. DOL has suggested it may allow employers to count up to 10% of an employee’s nondiscretionary bonus or incentive compensation toward satisfying the salary test, provided that such bonuses or incentive compensation are paid to an employee on at least a monthly or more frequent basis. DOL says that it is unlikely to allow commissions, discretionary incentive pay, or the value of other fringe benefits to be counted toward satisfying the minimum salary.

Although employers likely will experience some sticker shock from the proposed increase in the salary test, they can breathe a sigh of relief that nothing in DOL’s proposal would increase the minimum wage, and DOL has signaled, at least for now, its reluctance to propose any changes to the duties tests necessary to qualify for exemption. DOL explained that although it recognizes imperfections with the duties tests, it believes that substantially increasing the minimum salary will remove from consideration some of the more questionable determinations, under the duties tests. DOL did, however, invite public comment on whether it should revisit the duties tests for any of the exemptions.

Take-Aways

Although the process of implementing new wage and hour regulations has often been painstakingly slow, we believe the Administration is working swiftly to implement the new regulations before President Obama leaves office. Employers should not wait for final regulations to begin assessing how the regulations will affect their organizations. How employees are classified (exempt versus non-exempt) often goes to the bottom line budgetary structure of any organization. Employers should gather stakeholders throughout their organizations now to evaluate how a substantial change to the minimum salary test will affect staffing, policy, compensation, benefits, production, supervision, customer contracts, and budgets.

The last new law to substantially affect how employers classify their employees was the Affordable Care Act (“ACA”), which implicated how employers classify full and part-time employees. In the wake of the ACA, many employers acted swiftly to preserve the status quo of their underlying budgetary assumptions (i.e. re-defining their part-time classifications to include only those employees who work under 30 hours per week, on average) without first considering how such a change would affect multiple layers of their organization. Compliance with an increased salary test will not be as easy as simply making the previously exempt employee non-exempt. By DOL’s own estimates, the proposed regulations would cost employers almost $2 billion in the first year of compliance, alone. In addition to the budgetary risks associated with overtime, employers will face challenges coming up with appropriate hourly rates for formerly salaried employees, employee retention, tracking and management of hours worked, and cultural changes. Employees frequently consider exempt status to be a reflection of their importance to an organization. Often times, an employer’s fringe benefit programs will similarly reflect this importance by granting exempt employees greater schedule flexibility, vacation, sick leave, or similar benefits, and more employee-level discretion over how those benefits are used. Each of these considerations must be part of your organization’s plan of action in anticipation of these proposed regulations becoming final.

Finally, employers should be sure to avail themselves of the right to comment on the proposed regulations. Once the proposed regulations are published in the Federal Register (likely within the week), individuals, employers, and special interest groups will have 60 days to submit their comments on the proposed rules. Under the Administrative Procedure Act, federal agencies have an obligation to consider each and every public comment they receive. In our experience, employers all too often find themselves victimized by new regulations without having asserted their right to comment on regulations before they become final. Comments may be submitted online at www.regulations.gov, once the comment period is open. Comments should reference these proposed regulations by using the code, “RIN 1235-AA11.”

Please contact your Maynard & Gale labor and employment attorney if you would like help in submitting a comment or to discuss your organization’s response to the proposed regulations.

¹The proposed regulations may be reviewed at: http://www.dol.gov/whd/overtime/NPRM2015/OT-NPRM.pdf

²Highly compensated employees—those making at least $100,000 in annual compensation including at least $455 per week in salary—are exempt from the minimum wage and overtime rules so long as they regularly and customarily perform at least one of the duties necessary to qualify under a white collar exemption. Under the proposed rules, DOL would index the highly compensated employee salary threshold to the 90th percentile of average weekly wages for full-time salaried employees, which is currently projected to be $122,148, annually.