Late last week, the U.S. Department of Labor (“DOL”) issued its proposed overtime rule, proposing changes to the federal minimum salary requirements needed to fall within the exemptions to the Fair Labor Standards Act’s (the “FLSA”) minimum wage and overtime pay regulations.

It is important to note that the proposed changes would apply at the federal level, with many states already having salary requirements that exceed the proposed changes for exemption.  For those of you in California, for example, the state’s minimum wage and overtime regulations require that employees make at least twice the state’s minimum wage for full-time employment, or a total of approximately $47,000 – $50,000 per year (depending on the applicable minimum wage based on employer size), to be exempt from the state’s overtime provisions.  California also has its own duties test.  Exempt employees in California must satisfy both the state and federal tests to qualify as exempt.

White Collar Exemptions

As a quick refresher, employees that fall within the FLSA’s executive, administrative, professional, outside sales, or certain computer-related employees exemptions (collectively, the “white collar exemptions”) are exempt from federal overtime pay requirements.  To be exempt, employees must (1) be paid a predetermined and fixed salary that is not subject to reduction based on the quality or quantity of work performed, (2) the employee’s weekly/annual salary must meet a specified amount, and (3) the job duties of the employee must fit within one of the white collar exemptions.

The proposed rule deals with the second test, often referred to as the salary basis test and proposes that:

• To “pass” the salary basis test, employees must receive a weekly salary of at least $679 (up from the current rate of $455 per week), which is the equivalent of $35,308 per year (up from $23,660 annually).

• Employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the employee’s salary for purposes of meeting the salary basis test, if the payments are made on an annual or more frequent basis. If an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year to retain exempt status, the employer can make a “catch-up” payment within one pay period after the end of each 52-week period to bring the employee’s compensation up to the required level.  This payment can be up to 10 percent of the total standard salary level for the preceding 52-week period.  The proposed rule seeks input on whether the 10 percent cap should be increased or decreased.

Motion Picture Producing Industry Employees

Those in the motion picture producing industry that fall within one of the white-collar exemptions will “pass” the salary basis test under the proposed rule if they are paid a base rate of $1,036 per week or a proportionate amount based on the number of days worked (up from $695 per week).

Highly Compensated Employee

To qualify for an exemption as a “highly compensated employee,” under the proposed rule, the employee must receive:

• A total annual compensation of $147,414 (up from $100,000 annually); and

• At least $679 per week on a salary or fee basis not including payment of nondiscretionary bonuses and incentive payments.

Remember, employees that meet the above salary conditions do not automatically qualify for this exemption.  The employee’s primary duty must include performing office or non-manual work and the employee must “customarily and regularly perform least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.”

Implications

For now, there is no need to do anything as this is a proposed rule.  However, if implemented, employers that operate in states where only the FLSA applies or have state laws with a minimum salary requirement for exemption that falls below the proposed new standards should re-evaluate their current classification of employees, as employees may now need to be reclassified as non-exempt (or receive a raise).  Because the rule proposes updating earning thresholds every four years, employers may need to re-evaluate employee eligibility for exemptions more frequently.