United States: New FLSA Overtime Exemption Rules Expected Imminently

Seyfarth Synopsis: As early as next week, the Department of Labor is expected to issue its final rule implementing revisions to the regulations governing the application of the FLSA's "white collar" exemptions from overtime and minimum wage. 

The culmination of more than two years' worth of work by the Department, the final rule has the potential to impact the exempt status of a wide variety of positions in virtually every industry and impose the most significant changes to those regulations in at least a decade. 

In this Client Alert, we bring you the latest intelligence on the content and timing of the final rule, as well as what you can expect from your team at Seyfarth Shaw in the coming weeks.

We have also created a special update series on the new FLSA overtime exemption rules. To receive this special series, please subscribe by clicking here.

Do we know what the final rule contains?

Not yet.  The substance of the final rule will not be known to the public until the Department announces the rule.  That announcement will not take place until after the final rule has been approved by the White House's Office of Management and Budget (OMB).  OMB has been meeting with a wide range of stakeholders since it began its review on March 14.  

OMB does not reveal the contents of the final rule during its meetings.  Nevertheless, stakeholder attendees often leave the meeting with definite ideas of what the rule will contain.  And, government officials sometimes leak information to the media. Here's what the Department proposed on the key issues and what we've been hearing we might expect in the final rule.

Topic Proposal Expected Final Rule
Salary Level $47,892 per year in 2015

$50,440 per year in 2016
Between $45,000 and $50,544 per year
Highly-Compensated Employee Salary Level $122,148 per year in 2015 $122,148 per year
Salary Indexing Automatic annual updates of salary level based on 40th percentile of full-time salaried workers OR CPI-U

Automatic annual updates of highly-compensated employee salary level based on 90th percentile of full-time salaried workers OR CPI-U
Both salary levels automatically updated on annual basis using inflationary measure such as CPI-U or CPI-W
Duties Tests No specific proposals, but several questions asked about possible changes to duties tests No changes to duties tests expected

What's the expected timing for all of these changes?

Due to the impact of a seldom-used, but potentially significant law known as the Congressional Review Act (CRA), it is widely believed that the Department wishes to publish the final rule (and provide the required notices to Congress) by May 16, 2016.  Regulations submitted to Congress after that date are expected to be subject to the CRA's "clawback" provision, which would push the deadline for Congress to vote to "repeal" the rulemaking into the next--and possibly more employer-friendly--Administration.

In the spring of 2015, OMB completed its review of the proposed rule in 55 days.  As of today, the final rule has been under OMB review for 50.  With OMB stakeholder meetings on the rule scheduled as late as May 10, it is not likely that the final rule will be published before then, but it is entirely possible that the Department will announce the rule within a day or two of those meetings.

Once the rule is announced, will there be some type of grace period for implementation?

The final rule will almost certainly be a "major" rule, which, as a matter of law, means that the rule cannot be effective for at least 60 days following its publication in the Federal Register. 

One of the major concerns raised by employer groups in their meetings with OMB, however, has been the difficulty they will have implementing a change to the salary threshold in such a short period of time, particularly when no employer knows what that salary threshold will be.  Upon learning the salary level, employers will need to determine the set of impacted positions and assess whether to convert each position to non-exempt, raise the salary level, and/or engage in some restructuring of the organization to better accommodate the new salary requirement.  In addition, employers will need to consider how the decisions with respect to the impacted positions have further effects on positions outside the impacted population. 

Compounding the difficulty in implementing salary threshold changes are (among other things) the technical requirements for implementing such changes in payroll systems, the need to train newly non-exempt employees on timekeeping matters (and, potentially, to add more timeclocks to account for the new population), and state law requirements to notify an employee of changes to the amount and/or method of pay in advance (in some states a pay period in advance).  Add to that the preparation of communications plans to implement each of these elements, and it is clear that a 60-day implementation would be extremely difficult.

As a result, the employer community has asked OMB to provide for a longer effective date period.  In 2004, the Department gave employers 120 days to implement a far more modest salary increase, and we are hopeful that it will do the same here.

What should I be doing now?

Whether the effective date is 60 or 120 days or even 180 days, implementation of the Department's changes is going to require prompt and focused action by employers.  Employers would be wise to identify now, if they have not already done so, the positions that may be subject to the salary threshold increase, whether the new level will be $45,000 or $50,000, or somewhere in between.  Such a review should consider how operations would be impacted by reclassification to non-exempt status and/or a salary increases to ensure compliance and the impact of those changes on other employees in addition to those directly impacted. 

Employers also may take this time to determine how much lead time will be necessary to implement any changes by their payroll and timekeeping vendors and to assess whether training regarding timekeeping practices and general management of newly reclassified non-exempt employees is desirable (and, if so, when and how to provide it).

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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