Yesterday, the U.S. Department of Labor ("DOL") announced a much-anticipated proposed rule that, among other things, more than doubles the salary threshold required for an employee to qualify as exempt from overtime pay under Fair Labor Standards Act ("FLSA") regulations that define exempt executive, administrative, and professional employees ("exempt white collar employees").
The current salary threshold for exempt white collar employees is $455 per week (i.e., $23,660 per year). The proposed rule increases that threshold to approximately $970 per week (i.e., $50,440 per year) for 2016.[1] This change would impact all industries, but certain industries, such as hospitality and retail, may feel the most significant impact. For example, retailers may be forced to reclassify currently exempt assistant store managers as nonexempt (and therefore entitled to overtime pay) if they earn less than $50,440 per year. Likewise, hotel and restaurant managers may no longer qualify as exempt white collar employees if they do not meet the minimum salary threshold. Indeed, the proposed rule would extend overtime protection to nearly 5 million workers in 2016, in all industries.
In addition to the salary threshold changes outlined above, the proposed rule would increase the annual compensation requirement for exempt highly compensated employees ("HCEs") from $100,000 to $122,148, potentially eliminating another group of workers from exemption unless salaries are significantly raised.[2]
The proposed rule also establishes a mechanism for automatically updating the salary and annual compensation thresholds for exempt white collar employees and HCEs going forward in order to "prevent the [thresholds] from becoming outdated with the often lengthy passage of time between rulemakings."
While the proposed rule does not make any changes to the duties test for exempt white collar employees, it does solicit comments on whether the standard duties test is working as intended to screen out employees who are not bona fide white collar exempt employees.
Additionally, in the proposed rule, the DOL seeks comments on the possibility of including nondiscretionary bonuses to satisfy a portion of the salary threshold for exempt white collar employees.
Importantly, the proposed rule does not provide any relief or exemption for small businesses or nonprofit organizations. Instead, the rule, like the FLSA generally, applies to employees of enterprises that have an annual gross volume of sales made or business done of $500,000 or more, and to those of certain other businesses, and provides that "[t]he FLSA creates a level playing field for businesses by setting a floor below which employers may not pay their employees."
A Frequently Asked Questions document published along with the proposed rule also reflects the DOL's plans to take a position on the use of electronic devices by white collar workers who may be newly entitled to overtime pay as a result of the rulemaking. The document provides that the DOL "understands the importance of this concern and will publish a Request for Information (RFI) in the near future seeking information from stakeholders on the use of electronic devices by overtime-protected employees outside of scheduled work hours." The RFI should be issued sometime next month (August).
Once the proposed rule is published in the Federal Register, employers will be able to comment and provide their input at http://www.regulations.gov. The deadline for such comments will be set once the proposed rule is published.
TAKEAWAY
The DOL has certainly made it clear that it is aiming to limit the number of employees who qualify as exempt from the FLSA's overtime requirements. Indeed, the proposed rule takes a strong stance on the provision of overtime, stating that "[a]t the proposed salary level, the number of overtime-eligible salaried white collar employees paid at or above the salary level would be reduced by more than 50 percent."
Savvy employers will monitor the proposed rule, as additional changes like some of those noted above (commentary on the duties test, the inclusion of nondiscretionary bonuses in the salary threshold, the use of electronic devices, etc.) are likely to come down the pipeline and/or be clarified.
Employers of all sizes and types and in all industries are also encouraged to take a close look at their current workforce and anticipate where adjustments may be necessary to comply with the new overtime regulations. Planning for the changes now, as compared to waiting for the changes to be finalized, is highly recommended.
Footnotes
[1] The proposed rule sets the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers. The DOL "believes that the 40th percentile of weekly earnings for full-time salaried workers represents the most appropriate line of demarcation between exempt and nonexempt employees" and "minimizes the risk that employees legally entitled to overtime will be subject to misclassification based solely on the salaries they receive, without excluding from exemption an unacceptably high number of employees who meet the duties test."
[2] The proposed rule sets the annual compensation requirement for HCEs to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers.
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