In March 2014, President Obama instructed the Department of Labor (“DOL”) to review the white collar exemptions to the Fair Labor Standards Act (“FLSA”) overtime rules. The white collar exemptions apply to employees who are paid salaries, perform certain types of work, and are not required to be paid overtime when they work more than 40 hours per week. These exemptions include professionals, administrators, executives, outside sales employees, certain computer employees and highly compensated employees (“HCEs”).
On June 30, 2015, the DOL issued a proposed rule (the “Rule”) with three key provisions.
First, the DOL set the standard minimum threshold salary for professional, administrative and executive employees at the 40th percentile of national weekly earnings for full-time salaried employees. Assuming the Rule is implemented during the first quarter of 2016, the new threshold salary would change from $455.00 per week, or $23,660 a year, to $970.00 a week, or $50,440 a year.
Second, the Rule increased the total annual compensation for an employee to qualify as an HCE to an annualized salary at the 90th percentile of weekly earnings for full-time salaried employees, a change from $100,000 per year to $122,148 per year.
Third, the DOL established a mechanism for automatically updating the minimum salary levels in the future to ensure that the salary levels continue to provide comparable tests for exemptions as the cost of living increases. The mechanism utilized by the DOL is to increase the minimum salary threshold for professional, executive and administrative employees so they remain at the 40th percentile of all salaries paid in the United States. For an HCE, the minimum salary threshold would remain at the 90th percentile of all salaries. If the 40th and 90th percentiles increase in future years, the minimum salary thresholds for the white collar exemptions will also increase by the same percentage.
The proposed Rule does not change the required job duties for any of the white collar exemptions. The Rule also does not change the requirement that employees covered by white collar exemptions must be paid on a salaried basis. The only requirement changed by the Rule is the minimum salary threshold for the exemptions.
There are differing estimates of the number of employees who will be affected by the changes in the salary threshold. The DOL estimates that 4.6 million people will be eligible for overtime pay because their salary levels will be insufficient to meet the white collar salary exemptions. The DOL also estimates that as many as 6 million additional employees, who are currently misclassified because their job duties do not fall within the exemptions, may now have their positions reclassified if their duties are scrutinized more carefully as a result of the Rule.
No specific date has been announced for the implementation on the Rule on white collar exemptions. Members of the media and lobbyists who follow the Executive Branch are predicting that the Rule is most likely to be implemented at some point during the first quarter of 2016. Employers who have classified employees as exempt and are paying salaries less than the new minimum threshold levels should analyze the salary thresholds and duties of their employees immediately and contact legal counsel to determine whether they may be required to increase their employees’ salaries or revise their duties.