New Overtime Rules Proposed: What You Need to Know

The Department of Labor (DOL) issued proposed changes to the overtime exemptions under the Fair Labor Standards Act (FLSA). The proposal would make substantial increases to the minimum salary requirement for white collar exemptions.

Background

The FLSA requires covered employers to pay “non-exempt” employees at least the minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a workweek. While most employees are non-exempt, the FLSA includes exemptions for certain administrative, professional, executive, highly compensated, outside sales, and computer professional employees. These employees are known as “exempt” employees.

To be considered exempt, these employees must generally satisfy three tests:

1. Salary-level test (currently, $455 per week for the executive, administrative, professional employee exemptions*)
2. Salary-basis test (receive their full salary in any week they perform work, regardless of the quality or quantity of the work)
3. Duties test (the employee’s primary duty must meet certain criteria)

There is also an exemption for “highly compensated” employees who are paid a total annual compensation of at least $100,000. These employees are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.

* Note: The computer employee exemption has its own salary-level test. The outside sales employee exemption has no salary-level test.

Proposed Regulations: New Salary Level Test

Under the proposed rules, the salary threshold for the executive, administrative, and professional employee exemptions would be set at the 40^th percentile for full-time, salaried employees using data published by the Bureau of Labor Statistics (BLS). In 2016, the DOL projects this amount to be about $970 per week (or $50,440 per year).

The salary threshold for highly compensated employees would also increase. The current threshold is $100,000 per year. The proposed rules would raise the salary threshold for highly compensated employees to the 90^th percentile, which was $122,148 in 2013. This amount would increase by the time a final rule is published.

Automatic Updates

The proposed rules would establish automatic annual increases to the two salary thresholds. The DOL is seeking comments on whether to tie the automatic increases to inflation or to make adjustments that would keep the salary requirements fixed at the 40^th and 90^th percentiles.

Regardless of the method used, the DOL proposed publishing the revised salary and compensation levels annually, at least 60 days before the updated rates would become effective.

No Proposed Changes to Duties Tests

The DOL did not propose any specific changes to the duties tests. However, the Department is seeking public comments on whether the duties tests are working as intended. It is possible that the comments may result in changes to the duties test, which may then become part of the final rules.

Here are some questions the DOL raised:

• What, if any, changes should be made to the duties tests?
• Should exempt employees be required to spend a minimum amount of time performing their primary duties? If so, what should that minimum be?
• Does the single duties test for each exemption category appropriately distinguish between exempt and non-exempt employees?

In addition to seeking comments on the duties tests, the DOL is also considering whether to add examples of additional occupations to provide guidance on how the exemptions apply to specific jobs.

Timeline

The public will have until September 4, 2015 to comment on the proposal. Once the comment period ends, the DOL will review the feedback and consider whether changes to the proposal should be made, a process that usually takes months. If the DOL then moves forward with a final rule, it is likely to be published in 2016 (at the earliest). After the DOL issues the final rules, employers will likely have some lead time before the rules take effect.

Compliance Recommendations

Employers should evaluate the potential impact on their business before the proposed rules become final. The DOL estimates that as many as 4.6 million workers could become newly eligible for overtime. Consider these action steps:

• Take this opportunity to review all exempt classifications to ensure that employees still qualify under the existing duties tests.
• If the rules become final and your exempt employees fall below the new salary threshold, you have two options: (1) re-classify the employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek; or (2) raise their salary to meet the new requirement. Budget for salary increases and/or increased overtime costs.
• In response to the new proposed rules, it is possible that some states will update their salary threshold as well. If this is the case, covered employers must comply with the higher minimum salary requirement.

We will continue to keep you abreast of changes. To learn more about the proposed regulations, register for our webcast on July 14, 2015.

This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. ADP does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog.

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