Today the U.S. Department of Labor (“DOL”) unveiled its long anticipated proposed rule that will, if enacted, raise the minimum salary threshold required to qualify for exemption from the Fair Labor Standards Act’s (“FLSA”) minimum wage and overtime requirements.  The proposal seeks to increase the current minimum salary requirement for the executive, administrative, professional, and computer employee exemptions from $455 per week ($23,660 per year) to $970 per week ($50,440 per year).  The proposed rule also seeks to increase the threshold for exemption as a “highly compensated employee” (“HCE”) from $100,000 to at least $122,148.  Both the minimum salary level for exemption and the HCE threshold would be increased on an annual basis after the new regulations become effective, under the DOL’s proposal. The DOL projects that, if enacted, 4.7 million workers will be affected by these changes.

Background:

The FLSA is the primary federal law governing minimum wages and overtime pay. It generally requires employers to pay their employees a minimum wage (currently $7.25 per hour under federal law) as well as an overtime premium for hours worked in excess of 40 per workweek, usually at a rate of one and one-half times the employee’s “regular rate” of pay. The FLSA does, however, exempt certain categories of “white collar” workers—including certain executive, administrative, and professional employees—from its minimum wage and overtime requirements. These employees generally must meet the current minimum salary threshold of $23,660 (at least $455 guaranteed per week) and satisfy various “duties tests” that include (depending on the particular exemption) managing a part of the enterprise and/or supervising other employees, performing tasks directly related to running and/or servicing the business of the employer or the employer’s customers, exercising discretion and independent judgment on significant matters, and/or performing tasks requiring advanced knowledge in a field of science or learning. Most employees earning less than $23,660 are automatically subject to FLSA minimum wage and overtime pay requirements and do not qualify for any exemption.

These “white collar” exemptions have been part of the FLSA since its enactment and the federal regulations interpreting them, codified at 29 C.F.R. Part 541, were revised most recently in 2004. In March 2014, President Obama issued a presidential memorandum calling upon the Secretary of Labor to “modernize and streamline the existing overtime regulations” so that they are more “consistent with the intent of the Act.”  The Administration, while providing no material guidance to the DOL on how to revise the regulations, sought to revamp the overtime rules for workers currently classified as exempt who earn salaries on the lower end of the minimum salary threshold and who work a great deal of overtime.  According to the White House, these workers are often “low level” managers or clerical employees who work alongside hourly employees and only have marginally more responsibility than their overtime-eligible coworkers.  As stated by the Administration, such a scenario is “unfair” and at odds with the underlying purpose of the FLSA.  The proposed rule issued today is the DOL’s response to this Presidential directive.

Proposed Changes:

As expected, the proposal calls for raising the minimum salary level for exempt white collar employees.  The increase to $970 per week reflects a “standard salary level” equal to the 40th percentile of earnings for full-time salaried workers and more than doubles the current salary requirement for exempt status.  If enacted, the proposed salary threshold will outstrip even more generous state wage and hour law requirements (e.g., the minimum salary requirement to qualify for the New York Labor Law’s administrative and executive exemptions is currently only $656.25 per week).

Notably, the DOL has stated in the proposed regulations that it is “considering” whether to allow nondiscretionary bonuses to satisfy some portion of the standard test’s salary requirement. Currently, such bonuses are only included in calculating total annual compensation under the HCE test. However, the DOL makes clear that it “believes it is important to strictly limit the amount of the salary requirement that could be satisfied through the payment of nondiscretionary bonuses” and is therefore contemplating capping bonus contributions, if ultimately considered as part of the weekly salary threshold at all, to 10%  of the standard weekly salary level.

The HCE exemption is also set to be revised.  This exemption currently applies to an employee who earns a total annual compensation of $100,000 or more, and “customarily and regularly” performs any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee.  The DOL seeks to raise the $100,000 threshold to $122,148 per year initially.

In order to prevent the salary and compensation thresholds from once again becoming “outdated” as time passes between rulemakings, the DOL proposes automatically updating these salary and compensation thresholds on an annual basis, either by maintaining the levels at a fixed percentile of earnings or by updating the amounts based on changes in the Consumer Price Index for All Urban Consumers.

Somewhat surprisingly, the DOL did not include any specific proposals to change the duties tests applicable to the “white collar” exemptions.  There were speculations that the revised regulations would replace the current qualitative “primary duty” test with a quantitative test – i.e., setting a minimum percentage of time that employees must devote to exempt duties in order to remain overtime-ineligible.  There was also conjecture that the DOL would redefine the duties tests in some other ways to make them more employee-friendly. Though the current proposed rule does not include such changes, the DOL stated that it is considering switching to a quantitative test and is generally inquiring whether changes to the duties tests are needed. It promises to consider input on the subject submitted through public comment.

Also, though not directly addressed in the proposed rule because it was considered “beyond the scope of this rulemaking,” the DOL acknowledged that currently exempt employees who work remotely on electronic devices may pose overtime concerns for employers should they lose their exempt status due to the forthcoming rule change.   In response to this concern, the DOL stated that it will publish a Request for Information “in the near future” seeking information from stakeholders on the use of electronic devices by overtime-protected employees outside of scheduled work hours.

Next Steps:

The next step in the rulemaking process is publication of the proposed rule in the Federal Register.  The proposal will then be subjected to a comment period of sixty days. Thereafter, following review of the comments, the DOL will publish a “final rule” that may differ from the proposal issued today.  The effective date for the amended regulations will most likely be sometime in 2016.

Implications:

Since 2004, when the “white collar” exemptions were last amended, employers have seen an explosion of litigation under the FLSA. The number of FLSA cases filed in federal courts has more than doubled, and the DOL’s Wage and Hour Division also has increased its compliance audits and investigations of wage complaints in recent years. The most recent fiscal budget released by the DOL for 2016 sets aside $277 million for the Wage and Hour Division to carry out its mission.  In addition to government enforcement, a successful private litigant can recover: (i) payment of any back wages or overtime going back up to three years (longer under some state laws); (ii) liquidated damages of up to 100% for willful violations; and (iii) reasonable attorneys’ fees and costs.  The DOL’s proposed changes will likely only trigger more activity by private litigants and federal and state agencies. Employers that have not done a classification audit in the past several years may be particularly at risk and would be wise to consider the following practice pointers concerning worker classification:

1. Evaluate the classification status of workers carefully at the outset of the work relationship to determine whether a worker is exempt or overtime-eligible. If you inherit a large number of exempt employees (such as following an acquisition or a merger), perform due diligence to determine if there is potential for misclassification liability;

2. Conduct a privileged audit of your exempt workforce to determine what portions of your workforce will be affected by the proposed new rules. For example, assuming that the DOL’s projections are accurate, employers should be prepared to increase the salaries of exempt workers who earn less than $50,400 per year, to reclassify those individuals to overtime-eligible, or to take other measures to address the increased costs.