United States: U.S. Department Of Labor's Proposed Amendments To Its Regulations Would Dramatically Expand The Number Of Employees Eligible For Overtime

On June 30, 2015, the U.S. Department of Labor ("DOL") issued its long-awaited proposed amendments to the Fair Labor Standards Act's ("FLSA") "white collar" exemption tests for executive, administrative, and professional employees. The DOL did not amend the duties portion of the tests; however, it did revise the salary basis and salary level tests. If adopted, the DOL estimates that the amendments will eliminate the exempt status for approximately 21.4 million employees—increasing the financial and regulatory burdens on employers doing business in the United States. Although it did not amend the duties portion of the white collar exemptions, the DOL discussed in detail the long and short duties tests, which were eliminated in 2004, and suggested that it may revisit the issue.

The proposed regulations more than double the annual salary required for an employee to be considered exempt from overtime or minimum wage under the FLSA's white collar exemptions. Additionally, unlike prior regulations, the proposed regulations do not rely on weighted data to determine the salary levels that would serve as the threshold for the exemptions but instead use data related to the compensation of all American salaried employees. By doing so, the proposed regulations do not take into consideration low-wage regions or low-wage industries, which will be most heavily impacted by the proposed changes.

Currently, to qualify for the FLSA's white collar exemptions, employees must be paid a salary of at least USD 455 per week (USD 23,660 annually) and must perform certain exempt duties. The "highly-compensated" exemption currently requires employers to pay a salary of over USD 100,000 annually. The proposed amendments increase the salary basis test from USD 455 per week to USD 970 per week (USD 50,440 annually) beginning in 2016. This new salary represents the 40th percentile of earnings for all full-time salaried workers throughout the United States. Similarly, the "highly-compensated" exemption under the FLSA has been increased from USD 100,000 to USD 125,148 annually, which is tied to the 90th salary percentile. Unlike the 2004 regulations, these amounts are not stagnant but will be automatically updated each year to the applicable 40 percent or 90 percent thresholds. This means each year employers may need to modify their payrolls to ensure their employees are properly classified as exempt.

Rather than proposing any changes to the duties portion of the test, the DOL solicited comments in response to several questions regarding possible revisions to the test, including whether the long and short tests should be re-adopted.

The Bottom Line: The DOL's proposed amendments focus on increasing the salary basis for the FLSA's white collar exemptions, with which both employers and employees are—for the most part—in agreement. The proposed changes will have a major impact on any employer who has employees classified as exempt who currently earn between USD 23,660 and USD 50,000.

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