United States: Are You Ready for the Proposed Changes to the FLSA White Collar Exemptions from Overtime?

Major changes to regulations under the federal Fair Labor Standards Act ("FLSA") will soon be upon us, and they are bound to have an impact on your employees. Currently, employers must generally pay overtime to employees who make $23,660 or less per year. A new Department of Labor ("DOL") rule – anticipated in the spring or summer of this year – is expected to more than double that salary threshold, requiring employers to pay overtime to any employee who makes up to $50,440. This 113 percent increase will make nearly five million employees across the nation eligible for overtime. With wage and hour litigation on the rise, now is the time to review your employees' status under the FLSA, and to assess any steps your company should take in response to these anticipated new rules. 

The Current White Collar Exemptions
Under the FLSA, "non-exempt" employees are entitled to overtime pay. "Exempt" employees are not. The largest category of exempt employees is for those in so-called "white collar" jobs, which include certain executive, administrative, or professional positions. Generally, an employee falls within the white collar exemption only if three criteria are satisfied:

(1) Salary Basis: The employee is paid a predetermined, regular, fixed amount, without regard to the number of days or hours he or she works.

(2) Salary Level: The employee earns a minimum salary, currently set at $455 per week, or $23,660 per year.

(3) Duties: The employee's duties involve certain tasks, authority, or training.

The regulations provide specific guidance on the so-called "duties tests." "Professional" employees generally include those in the learned professions. An "executive" employee regularly supervises others, is primarily involved in management duties, and has the authority to hire or fire. The administrative employee exemption – perhaps the most elusive and fact-sensitive category – includes employees who exercise independent judgment, and whose primary duty involves office or non-manual work that is directly related to management or business operations. 

The DOL's Proposed Changes
At President Obama's direction, the DOL released a Proposed Rule in July 2015 intended to "modernize and simplify" the white collar exemptions.[1] Most significantly, the proposed regulations would increase the threshold salary level from $455 per week (or $23,660 per year) up to $970 per week (or $50,440 per year) for 2016.[2] The proposal is aimed at first-line supervisors and managers, and, though the agency estimates it will affect nearly five million employees across the country, some have projected an impact in the range of fifteen million. 

For the first time ever, the Proposed Rule would also implement automatic annual increases to the salary threshold, tied to certain economic indices.[3] Further, although the DOL did not propose specific changes to the "duties" tests for each of the white collar classifications, it solicited comments, signaling that it may be inclined to revise those tests as well.[4]

The DOL's proposals are not yet in force and effect. During a sixty-day comment period last fall, the agency received nearly 300,000 comments. Following a review of the comments, the DOL will publish a "Final Rule" that may differ from its proposals. The Proposed Rule, however, provides strong indications of what may be contained in the Final Rule.

Now is the Time to Re-Assess Your Employees' Classifications
There has been an explosion of FLSA litigation in recent years. FLSA suits filed in federal court increased by more than 450 percent between 2000 and 2015, and have reached an all-time high in the past two years. Overtime violations are one of the most common allegations in these suits, which can often involve class actions. The DOL has also increased its compliance audits and agency-initiated investigations in recent years.

The new rules – which may be released in a matter of months – coincide with these trends and provide yet another trap for the unwary. It is crucial to conduct an internal wage and hour audit to assess your employees' FLSA classifications now. The costs of an audit pale in comparison to litigation: A successful private litigant (or class of litigants) can recover back wages or overtime, plus attorney's fees and costs, or even liquidated damages for willful violations.

Employers should identify those employees whose status may be affected by the anticipated salary threshold revision. If, as is expected, the automatic annual increase to the salary threshold is implemented with the Final Rule, employees could potentially oscillate between exempt and non-exempt status each year. This assessment should become an annual practice. 

It is a common misconception that an employee who receives a salary is automatically exempt. Salary, however, is just one of the prerequisites for exempt status. The employee must also perform exempt duties. In analyzing those duties, a job title is helpful, but is not determinative of exempt status. Instead, employers should assess the day-to-day duties associated with the job. 

It is not unusual to find that a few employees fall into the gray area between exempt and non-exempt status. Because the employer bears the heavy burden of proving that an employee clearly falls within the terms of an exemption, employers should err on the side of non-exempt status in these situations. With careful review and early preparation, your company can be equipped to act when these sweeping changes to the law go into effect.   

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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