Proposed Changes to FLSA Overtime Rules - Part I

On June 30, 2015, the United States Department of Labor (DOL) released proposed regulations that would amend various provisions of the Fair Labor Standards Act (FLSA).  In particular, the DOL proposed changes to the regulations governing the “white collar” exemption for executive, administrative, and professional employees.   The FLSA (and wage and hour laws, generally) are complicated but we will try to break down the key changes as simply as possible.

FLSA Overview

The FLSA generally requires employers to pay its employees at least the federal minimum wage plus overtime at a rate of at least 1.5 times the employee’s regular rate of pay for any hours worked over 40 in a week.  However, the FLSA provides for various exemptions from the overtime requirement.

The most commonly used exemptions are for executive, administrative, and professional employees, and are often referred to as the “white collar” exemptions.  However, the FLSA does not define the terms “executive,” “administrative,” “professional,” or “outside salesman” and the regulations have generally required that each of the following three tests be satisfied for the exemption 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”). 

The regulations also exempt “highly compensated” employees who “customarily and regularly” perform one of the exempt duties of an administrative, executive or professional employee, but who do not otherwise meet the duties test.  Currently, and since 2004, an employee earning $100,000 in total annual compensation (with at least $455 paid weekly on a salary or fee basis) would be exempt from overtime as a highly compensated employee.

Salary Basis Test – NO CHANGE

There were no proposed changes to the first requirement that employees be paid on a predetermined and fixed salary that is not subject to reduction.

Salary Level Test – BIG CHANGES!

Currently, and since 2004, any employee earning less than $455 per week ($23,660 a year) is considered “nonexempt” and therefore entitled to overtime pay for hours worked over 40 in a week, regardless of whether the employee is paid on an hourly or salary basis.

Under the DOL’s proposal, the salary level required for an executive, administrative or professional employee to qualify for exemption from the FLSA minimum wage and overtime requirements would increase from $455 a week ($23,660 a year) to $921 a week ($47,892 a year), based on 2013 data.  This means that anyone who makes less than $47,892 a year will be entitled to overtime pay for hours worked beyond 40.

The proposed regulations also set forth mechanisms for annually updating the minimum salary and if one of the annual update mechanisms is implemented, the DOL anticipates that the annual salary requirement in 2016 will be $970 a week, or $50,440 a year.

Duties Test – STAY TUNED

The DOL did not propose any changes to the duties requirements but did seek comments as to whether the duties tests should be updated.  Please stay tuned for Part II of this series for an outline of the current duties test. 

Highly Compensated Employees - CHANGED

The DOL’sproposed regulations increase the required salary for “highly compensated employees” to $122,148, indexed to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers.

The DOL’s proposed rule would effectively extend overtime protections to nearly 5 million white collar workers within the first year of its implementation.  Because the overtime regulations have not been updated in so long, employers have been able to classify more and more employees as exempt and therefore avoid paying overtime.  The overtime exception was originally meant to apply to highly-compensated executive, administrative, and professional employees although it now applies to workers earning as little as $23,660 a year. 

The DOL is expected to release its final rule later in 2016.