The U.S. Department of Labor (“DOL”) has proposed to raise sharply the salary levels needed to lawfully designate employees as “exempt” from overtime pay under the federal Fair Labor Standards Act (“FLSA”).
The proposed salary levels, which apply to all of the “white collar” exemptions that have salary requirements, are approximately 102 percent higher than the current salary thresholds. The proposal also would increase substantially the annual compensation requirement for the “highly compensated employees” exemption.
To prevent the new salary levels from becoming outdated, the proposed regulations call for automatic increases based on economic benchmarks, eliminating the need for formal rulemaking over this issue in the future.
As the proposed regulations could take effect by the end of this year or early in 2016, employers should begin planning now for the new salary levels. For some employers, achieving compliance within a sustainable business model may require various operational changes.
Administrative, Executive, And Professional Employees
Under the DOL’s proposed regulations, a salaried employee could not lawfully be designated as an “exempt” administrative, executive, or professional employee unless the salary met or exceeded “the 40th percentile of weekly earnings for full-time salaried workers.” In dollar terms, this would raise the salary threshold from $455 per week (the equivalent of $23,660 per year for a full-year worker) to $921 per week (the equivalent of $47,892 per year for a full-year worker), a 102-percent increase.
To the extent that exempt computer professionals are paid on a salary basis, the new salary threshold for administrative, executive, and professional employees ($921 per week) also would apply to them. However, based on a special provision in the FLSA, employers still would be able to pay exempt computer professionals a wage of at least $27.63 per hour as a salary substitute.
Highly Compensated Employees
The proposed regulations also would raise the annual compensation threshold for the “highly compensated employees” exemption. In this case, the employee’s total annual compensation would need to meet or exceed “the annualized value of the 90th percentile of weekly earnings for full-time salaried workers.” At present, this would increase the annual compensation requirement from $100,000 to $122,148. Moreover, this annual compensation would need to include regular salary payments of at least $921 per week.
Movie Industry Employees
Similar changes are being proposed to the special exemption from overtime pay for motion picture industry employees. Presently, such employees may be designated as “exempt” if paid a base rate of at least $695 per week (or a proportionate amount based on the number of days worked). Under the proposed rule, the base rate would increase by 102 percent to $1,404 per week.
Under the proposed regulations, the salary levels for these exemptions would adjust automatically. The DOL is considering two methodologies for achieving this. The first would continue to equate the salary levels with the 40th and 90th percentiles of weekly earnings for full-time salaried workers, respectively. The second would tie changes in the salary levels to inflation as measured by the Consumer Price Index for all Urban Consumers (the “CPI-U”).
To illustrate, the proposed salary level for executive, administrative, and professional employees, $921 per week, is equal to the 40th percentile of weekly earnings for full-time salaried workers. If this benchmark were adopted for the automatic adjustments, then, based on present projections, the salary requirement would increase to $970 per week (the equivalent of $50,440 per year for a full-year worker) in 2016.
Interplay With Duties Tests
The exemptions affected by the proposed regulations would continue to have the same “duties tests,” which, in addition to the salary tests, would need to be satisfied for the exemption to apply. But if an employee failed to cross the new salary threshold, he or she could not lawfully be designated as “exempt” regardless of how sophisticated the job may be.
The DOL is accepting public comments on the proposed regulations through September 4, 2015. Thereafter, the DOL may adopt the proposed regulations “as is” or with modifications at any time in its discretion.
Recommendations For Employers
As the regulations could become effective later this year or early in 2016, employers are encouraged to take the following steps:
- Review the salaries of all affected exempt positions;
- Calculate the cost of raising salaries, as may be necessary, to maintain the exemptions;
- Identify the employees whose salaries would be raised to maintain the exemption and those whose salaries would not be raised (and who, in turn, would become non-exempt and eligible for overtime pay);
- If your business would see an increase in non-exempt workers, consider whether modified work schedules, job duties, reporting relationships, or employment policies could help control overtime costs without sacrificing quality or productivity; and
- If a reduction in force were to become necessary, be sure to comply with all applicable laws to limit or eliminate potential liability.
As these recommendations suggest, adoption of the proposed regulations will substantially affect many employers’ business models and pose various workplace challenges. Accordingly, employers are advised to consult with experienced employment counsel in planning for the new salary levels and determining how best to achieve compliance.
Please contact the Law Office of Todd A. Newman, P.C. if you have questions about the proposed regulations or otherwise need assistance with wage-and-hour issues. We would be happy to help.