U.S. Department of Labor Unveils Proposed Regulations to Expand Overtime

On June 30, 2015 the U.S. Department of Labor released proposed regulations that would greatly increase the number of workers eligible to receive overtime pay.  This would be accomplished by raising the minimum salary necessary to be considered exempt from minimum wage and overtime under the Fair Labor Standards Act (FLSA).

Currently, under exemptions for executive, administrative, professional, outside sales and computer professionals, employees need to meet both a duties test and make a certain minimum amount in order to be ineligible for overtime pay.  The current salary basis is $455 per week ($23,660 per year).  Under the DOL proposal the salary basis would more than double to $970 per week ($50,440 per year).  This amount is equal to the 40^th percentile of weekly earnings for full-time, salaried workers.  In addition the DOL proposes to update the salary basis for so-called Highly Compensated Employees (HCE) from $100,000 per year to $122,148, an amount equal to the 90^th percentile of earnings for full-time salaried workers. The salary basis has not been updated since 2004.

The DOL is also considering – and seeking comment on – (1) automatically updating the salary minimum in order to keep this baseline from becoming outdated and (2) revising the duties tests under the white collar exemptions.

Because the salary basis for exempt employees under California law is currently just $37,440, California employers, who are typically not impacted much by changes to federal wage and hour law, will be directly affected as the higher federal salary minimum for exempt employees will apply in all 50 states. As such, assuming these salary minimums are formally enacted and become effective in 2016, employers who presently have exempt employees earning less than $50,440 per year will need to decide whether to convert such employees to non-exempt or increase their pay to the new minimum in order to continue to classify them as exempt.

The DOL has provided a relatively short period of just 60 days for stakeholders to submit feedback on the nearly 300 pages of proposed regulations.

Highlights of Proposed Regulations

1. Increases the salary basis for white collar exempt workers to $50,440 per year and increases the salary basis for highly compensated employees to $122,148 per year.
2. The DOL has not proposed specific modifications to the standard duties tests but is seeking comments on whether the tests are working as intended to screen out employees who are not bona fide exempt executive, administrative or professional employees.  In particular the DOL is concerned that the current duties tests allow exemption of employees who are performing a disproportionate amount of non-exempt work such that they are not exempt professionals in any meaningful sense.
3. A potential modification to the duties test would be to adopt a rule similar to California’s rule which prohibits exempt employees from spending more than 49 percent of work time on non-exempt tasks.  However, the DOL acknowledges that the California 50 percent primary duty model is problematic, and declined to adopt this model when it last updated the regulations in 2004.
4. While one goal of raising the salary basis under the white collar exemptions is to reduce ever increasing numbers of lawsuits over whether or not employees are properly classified as exempt, employers have expressed concern that imposing a limit like California’s to the amount of nonexempt work that exempt employees may perform would be much more problematic than the challenges encountered with the current tests and, in fact, lead to even more litigation.
5. The DOL is considering whether to allow non-discretionary bonuses to satisfy some portion of the standard salary requirement.  Currently such bonuses are only included in calculating total annual compensation under the HCE test.  Stakeholders, especially in the retail and restaurant industries, urge broader inclusion where significant portions of salaried exempt employees’ earnings may come in the form of such bonuses.  It seems likely that if the DOL allows nondiscretionary bonuses to be counted toward the salary minimums that it would adopt limits on the amount of the salary requirement that could be satisfied through nondiscretionary bonuses and incentive pay.  The proposed regulations indicate a cap at 10 percent of salary level.  A yearly “catch-up” payment such as is allowed for HCEs, is not being considered.
6. The DOL is committed to updating the salary basis levels more regularly.  It is considering – and seeking comment on – annual updates using one of two methods.  One approach is to tie the salary basis to the Consumer Price Index (CPI); the other is to maintain the salary basis at the 40^th percentile of weekly wages of all full-time salaried workers based on Bureau of Labor Statistics (BLS) data.
7. Comments on the proposed regulations may be submitted electronically at the Federal eRulemaking Portal at http://www.regulations.gov.  Comments must be submitted by 60 days after the date of publication in the Federal Register, which will be soon, or may have already occurred as of the date of this publication.  All comments must be identified by including: RIN 1235-AA11 in the submission.  When the regulations were last updated in 2004 the DOL received 75,000 comments during a 90-day comment period
8. The DOL also plans to publish a Request for Information in the near future seeking information from stakeholders on the use of electronic devices by overtime-protected employees outside of scheduled work hours.  This recognizes employer concerns that employees who are newly entitled to overtime under a higher salary level requirement would lose the flexibility they currently enjoy to work remotely on electronic devices because of employer concerns about overtime liability.