United States: DOL Issues Proposed Revisions To FLSA Overtime Exemption Regulations

The proposal seeks to significantly increase the salary level needed to qualify as exempt under the FLSA's white collar standard and highly compensated exemptions.

On June 30, the US Department of Labor (DOL) announced the highly anticipated proposed revisions to the Fair Labor Standards Act's (FLSA's) overtime exemptions. The proposed revisions increase the minimum salary needed to qualify for the FLSA's standard white collar exemptions to be equal to the 40th percentile of weekly earnings for full-time salaried employees (projected to be $50,440 annually or $970 a week in 2016). The DOL also proposes to increase the minimum total annual compensation required to qualify for the highly compensated exemption to be equal to the 90th percentile of earnings for full-time salaried employees ($122,148 per year as of 2013). Additionally, the DOL proposes to adjust (and likely increase) these minimum salary and compensation levels on an annual basis. The proposed rule does not include changes to the FLSA's duties test , but the DOL nevertheless seeks comments on whether, in light of its compensation proposals, changes to the duties test are necessary.

The DOL is providing the public with a 60-day period after the proposed rule is published in Federal Register to comment on it. The DOL estimates that 4.6 million workers who are now classified as exempt under the current regulations will become overtime-eligible under the proposed regulations without some intervening action by their employers.

On July 7 at 12 p.m. eastern time, Morgan Lewis will host a one-hour webinar to discuss the proposed regulations and to address what employers should do in light of the proposed changes, including consideration of compensation plan options and a communications strategy in the event of a reclassification. Register for the webinar.

Background

The FLSA's white collar exemptions exclude certain executive, administrative, and professional employees from federal minimum wage and overtime requirements. Presently, to qualify for one of these exemptions, employees generally must (1) be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed ("salary basis test"); (2) be paid more than a specified salary threshold, currently $455 per week or $23,660 annually (the "salary level test"); and (3) primarily perform executive, administrative, or professional duties as provided in the DOL's regulations (the "duties test").1

Additionally, certain highly compensated employees are exempt from the FLSA's overtime pay requirements if they are paid total annual compensation of at least $100,000, receive at least $455 per week paid on a salary or fee basis, perform office or nonmanual work, and customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.2

The FLSA regulations were last updated in 2004. In March 2014, US President Barack Obama directed US Secretary of Labor Thomas E. Perez to "modernize and streamline" the DOL's white collar exemption regulations. In issuing the proposed regulations, the DOL "seeks to update the salary level required for exemption to ensure that the FLSA's intended overtime protections are fully implemented, and to simplify the identification of nonexempt employees, thus making the executive, administrative and professional exemption easier for employers and workers to understand and apply."3

The Proposed Rule

The DOL's proposed rulemaking sets forth three key proposed changes to the current FLSA regulations:

  • A new minimum salary level to qualify for the white collar exemption standard salary-level test, which is set at the 40th percentile of weekly earning for full-time salaried workers. In 2013, this amount was $921 per week, or $47,892 annually. The DOL projects that in 2016, when the rule will likely take effect, the 40th percentile will be about $970 per week, or $50,440 annually.
  • A new minimum total annual compensation requirement to qualify for the highly compensated exemption set at the 90th percentile of weekly earnings for full-time salaried workers. In 2013, this was $122,148 annually. The DOL does not propose what the amount will be in 2016.
  • A newly established mechanism for annually updating the minimum salary and compensation levels for these exemptions going forward.

DOL Requests for Comment

The DOL also seeks comments on a variety of issues throughout the proposal. For example, the DOL is specifically seeking comments from the public on whether to allow incentive compensation and nondiscretionary bonuses, such as a production bonus, to be considered in determining whether the salary-level test is satisfied. The DOL noted that although it is considering such a change from the current requirements that do not permit such credits, it likely will cap the amount of incentive pay and nondiscretionary income that could be considered and is currently considering capping at 10% of the standard weekly salary level. The DOL also noted that in order for employers to be permitted to credit such compensation toward the weekly salary requirement, it envisions requiring employees to receive the bonus payments monthly or more frequently. The DOL also expressly requested comments on whether commissions should be included as part of nondiscretionary bonuses and other incentive payments that could partially satisfy the standard salary-level test. In its discussion of this potential change, the DOL makes clear that it is not considering adding discretionary income, board, food, lodging, or benefit payments as a credit in satisfying the salary-level requirements.

The DOL is also seeking comments regarding the methodology it should use in annually updating the minimum salary and compensation levels going forward. The DOL has proposed two possible methodologies for consideration. The first proposal is to keep the required levels pegged to the 40th and 90th percentiles of earnings for full-time salaried workers. The second proposal would adjust the minimum salary and compensation amounts based on changes in inflation as measured by the Consumer Price Index for All Urban Consumers. Regardless of the methodology used, the DOL states that it will publish a notice with the new salary level in the Federal Register, as well as on the Wage and Hour Division's website, at least 60 days before the updated rates would become effective. The DOL specifically seeks comment on how frequently updates to the level should be made as opposed to the annual approach it is considering, as well as when such changes should be made (e.g,, on January 1 of each year or on the anniversary of the final rule's effective date).

No changes in the duties test are included in the proposed rulemaking. Nonetheless, the DOL is seeking comments on whether the current duties test is working to effectively screen out employees who are not bona fide white collar exempt employees. Specifically, the DOL is soliciting comments on what, if any, changes should be made to the duties test; whether employees should be required to spend a minimum amount of time performing work that is their primary duty in or to quality for an exemption (i.e., a requirement similar to California's 50% requirement for exempt employees); whether the DOL should reinstitute the long/short duties test used prior to the 2004 revisions to the regulations; whether additional examples of how the exemption may apply to specific jobs should be included in the regulations; whether the concurrent duties regulation for executive employees should be changed; and suggestions regarding further examples of the application of white collar exemptions to employees in computer-related fields.

Comment Deadline and Timing Implications

The 295-page proposal was posted on the DOL's website on June 30, but it has not yet been published in the Federal Register, which triggers the start of the comment period. We expect it to be published in the next few days. Comments are due 60 days after publication, which means that the deadline for submitting comments will likely be in early September, unless an extension to the comment period is granted. At this point, it is unclear when the final regulations will be published, but we do not expect them to be issued before 2016. The effective date of the new regulations likely will occur at least 30–60 days after the final regulations are published.

Additional Guidance

In addition to issuing the proposed rulemaking, the DOL issued a factsheet4 and answers to frequently asked questions5 regarding its proposed revisions.

Conclusion

The proposed revisions to the FLSA's white collar exemptions are designed to extend overtime protections to millions of employees. Employers should consider the following actions.

First, companies and trade associations affected by the proposal and possible changes to the duties tests should consider submitting comments to ensure that the regulatory record reflects the true impact of any proposed changes and to shape the final rule.

Second, the significant increase in the compensation required to meet the proposed salary-level test will likely affect long-standing staffing and compensation models. Additionally, the publicity generated by the proposed changes may cause a number of employees to question whether they are properly classified. As such, although any final regulatory change is not imminent, we recommend that companies consider auditing their current employee population to determine what changes will be made to staffing models and the classification of "close to the line" positions if and when the proposed rule becomes final. Those changes may include raising the salary for certain employees to meet the new proposed standards, bolstering job duties, or reclassifying employees from exempt to nonexempt. Reclassifying exempt employees to nonexempt, in turn, requires considering a broad range of issues, including communication strategy, manager and employee training, timekeeping policies and practices, scheduling, compensation structures, calculation of the overtime rate, and many other issues. Planning ahead is critical to managing the risks associated with reclassification.

Footnotes

1 Certain outside sales and computer professional employees also may qualify for a white-collar exemption test, but payment of a salary is not required to satisfy these tests.

2 See 29 C.F.R. 541.601.

3 See here.

4 See here.

5 See here.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.