The U.S. Department of Labor’s (DOL) release of new proposed rules regulating who is eligible for overtime pay has employers scrambling to determine how many of their workers will need to be reclassified when new regulations take effect.
Currently, the salary threshold for an employee to be exempt from the Fair Labor Standards Act (FLSA) is $455 a week ($23,660 a year). That figure was last revised in 2004. The new proposed rule puts the floor at an estimated $970 a week ($50,440 a year) for 2016.
The regulations propose setting the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers. The DOL estimates that the 2016 level will be approximately $970 per week. Following publication in the Federal Register, the proposed regulations will be up for public comment before the DOL issues final regulations.
“In the meantime, employers should start planning for significant increases in the number of employees who will be entitled to overtime compensation,” Judith E. Kramer, an attorney with Fortney & Scott, LLC, in Washington, D.C., said following release of the proposed rules. “They should review the job duties and salary levels of employees currently classified as exempt and determine which employees will likely be deemed nonexempt under the new regulations.”
Employers are required to pay overtime when employees not exempt from the FLSA work more than 40 hours in a workweek. Overtime pay must be at a rate not less than one and one-half times the worker’s regular rate of pay.
“Employers will continue to be able to limit the amount of overtime compensation due such employees so long as employers limit the number of overtime hours the employees work,” said Kramer, who also is an editor of Federal Employment Law Insider.
Susan G. Fentin, an attorney with Skoler, Abbott & Presser, P.C., in Springfield, Massachusetts, and an editor of Massachusetts Employment Law Letter, said the release of the proposed rule is likely “just the tip of the iceberg.” She said she expects the DOL to soon propose a rule that requires exempt employees to spend more than 50 percent of their time performing exempt work to qualify for the executive exemption.
“Currently, under the FLSA, the amount of time spent on exempt duties is important but not dispositive: Primary duty is determined by looking at the job as a whole to identify what the employee’s most important duty is,” Fentin said. Therefore, under current regulations, employees who spend less than 50 percent of their time performing exempt work can still qualify for the exemption if other factors indicate an exempt “primary duty.”
Effect on small employers
Robert A. Kaiser, an attorney with Armstrong Teasdale LLP in St. Louis, Missouri, said the new rule likely will produce “a lot of consternation” among small employers, who represent probably 50 percent of the employers in the country. He called the new salary threshold a “significant blow” since many owners of small businesses don’t make $50,440 a year themselves.
A problem with focusing on the salary part of the test to determine exempt versus nonexempt status is that it only takes into account an employee’s gross wage and ignores the flexibility that exempt status affords to both the employer and employee, Kaiser said.
Many employees want the flexibility to take time off for personal matters during slow times while realizing that they’ll have “to kick into gear” at other times, Kaiser said. Those employees appreciate knowing from week to week what they’ll be paid without worrying about how their schedule will affect their paycheck. He said those employees will react negatively to being switched from exempt to nonexempt.
Rule not final
Kara E. Shea, an attorney with Butler Snow LLP in Nashville, Tennessee, and an editor of Tennessee Employment Law Letter, said employers should keep in mind the proposed rule isn’t final and carries no date or timeline for when it might become final. For now, employers need to consider the possibility that they will have employees who “may need to be reclassified to nonexempt (or have their pay increased) at some point in the near future and plan accordingly.”
From her reading of the proposed rule, Shea said it looks like the DOL is considering including nondiscretionary bonuses as satisfying the new salary level, but it’s looking for comments. Discretionary bonuses, benefits, lodging, etc., won’t be considered part of salary. She said it looks like commissions probably won’t be considered part of salary, but that is open for comment as well.
Shea said it also looks like the DOL is considering implementing some kind of automatic salary increase process to make sure salary levels keep up with current economic conditions, but it hasn’t decided specifics, and the matter is open for comment.
In addition, Shea said, the DOL isn’t proposing changes to the duties tests, but it welcomes comments to the contrary. “The fact that the DOL has not proposed any changes to the current duties tests for the exemptions is good news for employers, since any changes they did propose probably would have made the exemptions harder to apply,” she said.
Shea said there was speculation that a strict limit would be placed on the amount of nonexempt work that could be performed by exempt employees (similar to California’s 50 percent rule) or that the concept of a supervisor being able to perform exempt supervisory work simultaneously with nonexempt work would be removed from the regulations. “The fact that the DOL has not proposed making these changes is good news for employers, though, again, the DOL is seeking further comments on these issues, so none of this is final,” she said.
The proposed rules would make nearly five million more white-collar workers eligible for overtime pay within the first year of implementation, according to the DOL. Exempt workers include certain executive, administrative, and professional employees as well as certain computer professionals and outside sales employees.
The DOL has posted a fact sheet explaining that the proposed rules focus on updating the salary and compensation levels needed for white-collar employees to be exempt. In addition to setting the standard salary level at the 40th percentile of weekly earnings, the rule also increases the total annual compensation requirement needed to exempt those workers whom the law defines as “highly compensated employees” to the 90th percentile of weekly earnings of full-time salaried workers ($122,148 a year).
The proposed rule also proposes that a mechanism should be established for automatically updating the salary and compensation levels going forward.
In addition to the salary threshold, workers must meet the “duties tests” to determine exempt status. The DOL fact sheet says the new proposed rules aren’t making specific proposals to modify the standard duties tests, but it is seeking comment on whether those tests “are working as intended to screen out employees who are not bona fide white collar exempt employees.” The standard duties test doesn’t strictly limit the amount of nonexempt work an employee who is classified as exempt can perform and still keep the exemption.