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DOL Issues Notice of Proposed Rulemaking Concerning Federal Overtime Standards

Summary

On June 30, 2015, the U.S. Department of Labor (“DOL”) issued a notice of proposed rulemaking that seeks to expand federal overtime pay protections by raising the minimum salary requirement to qualify for the white collar exemptions under the Fair Labor Standards Act, 29 U.S.C. §§ 201 et seq. (“FLSA”). The DOL estimates that the proposed rule would make an additional 4.6 million employees eligible for overtime pay (i.e., “non-exempt”). Key aspects of the proposal are as follows:

• Raising the salary test for the white collar exemptions to an amount equal to the 40th percentile of weekly earnings for full-time salaried worked pursuant to Bureau of Labor Statistics (“BLS”) data. This would amount to $921 per week or $47,892 per year based on BLS data from 2013.
• Raising the compensation test for highly compensated employees to an amount equal to the 90th percentile of weekly earnings for full-time salaried worked pursuant to BLS data. This would amount to a total annual compensation requirement of at least $122,148, with a weekly payment on a salary or fee basis of $921 per week, based on BLS data from 2013.
• Regularly adjusting the salary test and total annual compensation test based on either (i) a fixed percentile of earnings for full-time salaried workers or (ii) changes in the Consumer Price Index for all urban consumers (“CPI-U”).

The proposed rulemaking provides for a 60-day comment period, starting upon publication in the Federal Register.

Discussion

The FLSA provides for overtime pay to non-exempt employees at a rate of not less than 150% of the employee’s regular rate for hours worked over 40 in a workweek. Certain executive, administrative, and professional employees are exempt from these protections if they meet both a salary test and a duty test (the “white collar” exemptions or “EAP” exemptions). Current DOL regulations set the salary threshold for the white collar overtime pay exemptions to $455/week (or an annual salary of $23,660). The proposed rulemaking would set the new salary test to the 40th percentile of weekly earnings for full-time salaried worked pursuant to BLS data. The DOL used 2013 data for the proposed rulemaking, which would lead to a salary test equal to $921 per week or $47,892 per year. The DOL anticipates using first quarter 2016 data in the final rule, which it estimates could lead to a salary test of $970 per week or $50,440 per year.

The proposed rulemaking also contemplates setting the total annual compensation test for highly compensated employees to the 90th percentile of weekly earnings for full-time salaried workers pursuant to BLS data. Based on the 2013 data used in the proposed rulemaking, this would amount to a total annual compensation requirement of at least $122,148, but the threshold in the final rule will be higher.¹

The proposed rulemaking further notes that “the salary level test plays a crucial role in ensuring that the EAP exemptions effectively differentiate between exempt and overtime-protected workers” but that “even a well-calibrated salary level that is fixed becomes obsolete as wages for nonexempt workers increase over time.”² Accordingly, the DOL intends to create a mechanism by which the salary test and total annual compensation test (for highly compensated employees) will be updated on a regular basis. The proposed rulemaking solicits comment on the appropriate frequency for this readjustment, as well as comment on whether the readjustment should be based on (i) matching the salary test to the 40th percentile of earnings for full-time salaried workers or (ii) changes to the CPI-U.

In conjunction with this increase to the salary test, the DOL appears willing to allow some amount of non-discretionary bonuses and/or incentive payments to count towards the salary test. This would be a departure from current practice, but the DOL noted that “several business representatives” indicated that “nondiscretionary bonuses and incentive payments are an important component of employee compensation in many industries” and that “such compensation might be curtailed if the standard salary level was increased and employers had to shift compensation from bonuses to salary to satisfy the new” requirements.³ In light of this, the DOL is considering allowing non-discretionary bonuses and/or incentive payments to account for 10% of the weekly salary test, so long as the payments are made monthly (or more frequently).

Lastly, although the proposed rulemaking does not contain any specific changes to the duties tests of the white collar exemptions, the DOL is also seeking comment on the duties tests. Specifically, the proposed rulemaking cites concern that “a disproportionate amount of time spent on nonexempt duties may call into question whether an employee is, in fact,” exempt under the white collar exemptions. The DOL appears to be considering a move from the “primary duty” test to California’s approach, which requires that exempt employees spend more than 50% of their time performing exempt duties. Accordingly, the DOL has solicited comment on a number of aspects of the white collar exemption duties tests, including:

• “what, if any, changes should be made?”;
• “should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption?”; and
• “should the [DOL] reconsider our decision to eliminate the long/short duties tests structure?”⁴

In sum, the proposed rulemaking is likely to more than double the current salary threshold for the white collar exemptions. By the DOL’s own estimate, this will result in approximately 4.6 million employees who were previously entitled to exempt status becoming overtime-eligible.⁵ The proposed rulemaking also presages an effort by the DOL – at some point – to tighten the duties test, perhaps by moving to a 50% rule like in California. The proposed rulemaking will be published in the Federal Register in the coming days, which triggers a 60-day comment period.⁶ After consideration of all comments received, the final rule is likely to take effect sometime in 2016.⁷

If you are considering commenting on the proposed changes, we would be happy to discuss that with you and to help facilitate that process.

¹ The proposed rulemaking also contemplates commensurate changes to the salary test with regard to computer employees, bona fide administrative employees of educational establishments, certain individuals employed in the motion picture producing industry, and individuals in American Samoa.

² Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 29 C.F.R. Part 541, RIN 1235-AA11, at Page 77 (proposed June 30, 2015).

³ Id. at 70.

⁴ Id. at 96. The proposed rulemaking devotes a significant amount of space to discussing, and implicitly criticizing, the 2004 decision by the Bush Administration’s DOL to eliminate the “short” and “long” tests and move to a consolidated test.

⁵ See id. at 57.

⁶ See id. at 2.

⁷ See id. at 7 n1 (expressing an intent to use 2016 data in the final rule).