US DOL Releases Notice of Proposed Rulemaking
On June 30, 2015, the Department of Labor (“DOL”) announced a proposed rule to update the regulations governing which executive, administrative, and professional employees (white collar workers) are entitled to the Fair Labor Standards Act’s (“FLSA”) minimum wage and overtime pay protections. The Notice of Proposed Rulemaking (“NPRM”) was published on July 6, 2015 in the Federal Register. To review the full proposed rule go here. The proposed rule is the result of a Presidential Memorandum signed by President Obama earlier this year directing the DOL to update the regulations defining which white collar workers are protected by the Fair Labor Standards Act’s minimum wage and overtime standards. The Department last updated these regulations in 2004, and the current salary threshold for exemption is $455 per week ($23,660 per year). With this proposed rule, the Department seeks to update the salary level required for exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of nonexempt employees, thus making the executive, administrative and professional employee exemption easier for employers and workers to understand and apply.
The FLSA regulations implementing the white collar exemptions have generally required each of three tests to be met for the exemptions to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).
Under the current regulations, an executive, administrative, or professional employee must be paid at least $455 per week ($23,660 per year) in order to come within the standard exemption; in order to come within the exemption for highly compensated employees (“HCE”), such an employee must earn at least $100,000 in total annual compensation.
In the NPRM, the DOL proposes to set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers, estimating a 2016 level to be about $970 a week, or $50,440 a year. The Department is also proposing to set the highly compensated employee annual compensation level equal to the 90th percentile of earnings for full-time salaried workers ($122,148 annually). Furthermore, in order to prevent the levels from becoming outdated, the DOL is proposing for the first time ever to include in the regulations a mechanism to automatically update the salary and compensation thresholds on an annual basis using either a fixed percentile of wages or the Consumer Price Index.
The Department’s proposal to set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers is said to represent the most appropriate line of demarcation between exempt and nonexempt employees. This salary level 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. These changes are expected to extend overtime protections to nearly 5 million white collar workers within the first year of implementation.
The DOL is not proposing any specific changes to the standard duties tests; but rather “is considering whether revisions to the duties tests are necessary in order to ensure that these tests fully reflect the purpose of the exemption.’’ They are in fact seeking comment on whether the standard duties tests are working as intended to screen out employees who are not bona fide white collar exempt employees by asking number of questions:
- What, if any, changes should be made to the duties tests?
- Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?
- Should the DOL look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model? Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?
- Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the DOL reconsider its decision to eliminate the long/short duties tests structure?
- Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?
- Are there specific occupations for which the DOL should provide additional examples in the regulatory language?
And finally, the proposal seeks comments from interested parties as to whether to allow nondiscretionary bonuses, such as certain production or performance bonuses including nondiscretionary incentive bonuses tied to productivity and profitability, to satisfy a portion of the standard salary test requirement.
Interested parties are invited to submit written comments on the proposed rule during a 60 day public comment period at www.regulations.gov through September 4, 2015. Once the comment period closes, the DOL will review the comments and issue a final rule which may likely include revisions to the duties tests as well as the change in minimum salary levels, sometime in 2016. The effective date following the release of a final rule is expected to be of short duration.
The US DOL has posted the following resources on their website.
Note: The foregoing is provided for informational purposes only, and is not intended to be tax or legal advice. Consult your licensed attorney, accountant, or other tax professional to discuss your particular facts, circumstances, and how these opportunities might apply to your business.