The Department of Labor is poised to increase the minimum salary level required to qualify an employee to be paid on an exempt salaried basis (not entitled to overtime). The current salary requirement is $455/week. The proposed salary requirement is in the range of $921-$970/week or $47,000-$50,440/year in 2016. Employees who are not paid the new minimum standard salary level, to be determined, will not be able to be paid on a salary basis and must be paid hourly with overtime pay for work over 40 hours in a work week. Salaried employees must meet the new minimum salary level even if they otherwise meet the duties test for exempt salaried. There is no date set for the new regulation to take effect but it is expected to take place in 2016. The exact salary level is also not yet determined but it is expected to be in the range of $47,000-$50,440 a year.
We recommend that our clients begin to review their payroll rosters to determine which employees currently paid on a salary basis may be affected by the minimum salary increase, so that they can determine how best to proceed.
Under Section 13(a)(1) of the FLSA, employees that are employed in “a bona fide executive, administrative, or professional capacity . . . or in the capacity of an outside salesman” are exempt from the FLSA’s minimum wage and overtime requirements. The regulations contained in 29 C.F.R. §541 define the scope of the exemption. To qualify for the exemption under the current regulations, an employee generally must be paid on a salary basis in the amount of at least $455 per week and meet certain tests regarding job duties, including each of the following: (1) salary basis test: the employee must be paid a fixed salary that is not subject to reduction for variation in quality or quantity of work (see 29 C.F.R. §541.602); (2) salary level test: the salary paid must be a set minimum amount (see 29 C.F.R. §541.604); and (3) duties test: the duties performed by the employee primarily involve executive, administrative, or professional duties, as defined by the regulations (see 29 C.F.R. §541.700) depending on the category of exemption claimed (see 29 C.F.R. §§541.100; 541.200; 541.300; 29; 541.303; 541.400). In addition, an administrative or professional employee may be paid on a fee basis, meaning that the employee is paid an agreed sum for a single job regardless of the time required for completion. 29 C.F.R. §541.605.
Proposed Regulatory Revisions:
On March 13, 2014, President Obama signed a Presidential Memorandum directing the Secretary of Labor to propose revisions to modernize and streamline the existing overtime regulations. The memorandum further directed the Secretary to consider how the regulations can be revised to update existing protections consistent with the intent of the FLSA, address the changing nature of the work place, and simplify regulations so that they are easier for employees and businesses to understand and apply.
Following this Presidential Memorandum, on July 6, 2015, the Department of Labor published a 295-page NPRM regarding proposed revisions to overtime pay regulations. An electronic docket containing the rulemaking materials, supporting documents, public comments, and other relevant documents concerning the proposed overtime rule can be found at www.regulations.gov. The comment period is set to close on September 4 and the department is not expected to publish a Final Rule until 2016. However, the date that a Final Rule would be published is not yet known.
The primary changes proposed are in 29 C.F.R. §§541.600 and 541.601. Overall, the department proposes to update salary and compensation levels in the regulation as follows: (1) set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers; (2) increase the “highly compensated” employee annual compensation requirement to the annualized value of the 90th percentile of weekly earnings of full-time salaried employees; and (3) implement a mechanism to automatically update salary and compensation levels on an annual basis going forward. The proposal also discusses including nondiscretionary bonuses and incentive payments to satisfy a portion of the standard salary requirement and requests comments, but no specific changes are proposed. Similarly, the proposal includes discussion of the duties tests and requests comments, but no specific changes are proposed at this time.
As to the standard salary level, the department proposes to change the salary basis minimum requirement. Specifically, the proposed change will increase the minimum salary basis amount from $455 per week, or $23,660 annually, to an amount equal to the 40th percentile of weekly earnings for full-time salaried employees. The department used 2013 BLS data to set the proposed salary level for the rulemaking at $921, but has indicated that it will update the data used in the Final Rule. As such, if the Final Rule adopts the proposed salary level of the 40th percentile of weekly earnings, the department would likely rely on data from the first quarter of 2016, which is projected to be $970, or $50,440 annually. The department has invited comments on the proposed salary level, any alternative level, or methodologies. As to “highly compensated” employees, the department proposes to increase the total annual compensation requirement to the annualized weekly earnings of the 90th percentile of all full-time salaried workers, which amount was $122,148 in 2013. The department also proposes that the standard salary requirement must be paid on a salary or fee basis, but does not propose any changes to the highly compensated employee duties test. In addition, the department is considering two alternative methodologies for annually updating salary and compensation levels: (1) a fixed percentile approach tied to the 40th percentile of weekly earnings of full-time salaried employees or 90th percentile for highly compensated employees; or (2)update based on changes to the Consumer Price Index. The department has invited comments on these two methods. Overall, the department projects that 4.7 million employees will be affected by either an increase in standard salary level to the 40th percentile or an increase in highly compensated employee compensation level to the 90th percentile of weekly earnings.
Long versus short duties test:
As noted in the NPRM, from 1949 to 2004, the regulations contained both the long duties and short duties tests for exemption. Employees paid at a higher “short test” salary level were exempt if they also met a “short” duties test that lessened the duties requirements. Employees paid at the lower “long test” salary level were required to satisfy a more restrictive “long” duties test. In the 2004 Final Rule, the department eliminated the long and short tests in favor of one “standard” test that set the salary level under the current standard duties test at $455 per week for executive, administrative, and professional employees. At this time, the department is not proposing a return to the more detailed long duties test nor making specific proposals to modify the standard duties test.
The comment period for the proposed revisions is currently open and will close on September 4. After the comment period closes and the department reviews the comments, a Final Rule may be published for 2016.
If the department implements the new regulations as proposed, full-time salaried employees that earn less than $50,440 annually and currently qualify as exempt executive, administrative, or professional employees will become non-exempt and automatically eligible for overtime pay. The potential effects of the proposed revisions are significant as the proposed minimum salary level is more than double the existing level. In addition, the scope of persons potentially affected by the new regulations is extensive as the number of employees eligible for overtime is predicted to increase from approximately 8% to 40%. Therefore, employers should monitor these developments and begin to prepare and plan for the effects of a Final Rule to avoid increased costs and risks associated with the proposed changes.
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