By: Sally Griffith Cimini, Esq.
On June 30, 2015, the U.S. Department of Labor (“DOL”) announced its proposed rule to update the regulations defining and delimiting the exemptions for “white collar” employees under the Fair Labor Standards Act (“FLSA”). The proposed rule, which increases the salary requirement for the white collar exemption, would extend the FLSA’s overtime protections to an estimated five million workers.
One of the core components of the FLSA is its requirement that covered employees receive overtime pay for hours worked over 40 in a workweek. However, the overtime requirement does not apply to those employees who are exempt under the Act. Section 13(a)(1) exempts executive, administrative, and professional workers, often referred to as “white collar” employees. To fall within the white collar exemption, employees currently must be paid on a salary basis of no less than $455 per week and perform certain types of duties that are directly related to the management or general business operations of their employer, or that require specialized academic training.
As the DOL explains in its proposed rule, white collar employees were originally exempt from the FLSA’s overtime pay requirement because it was assumed that they would enjoy “compensatory privileges” (i.e., their salaries would be substantially higher than those earning minimum wage, making extra pay for any hours worked over 40 unnecessary). However, the current salary threshold of $455 per week results in the exemption applying to executive, administrative and professional employees earning as little as $23,660 a year.
Realizing how the current salary threshold impacts a large subset of U.S. workers, President Barack Obama signed a Presidential Memorandum in March 2014 directing the DOL to update the regulations defining which white collar workers are protected by the FLSA’s minimum wage and overtime standards.
The Proposed Rule
The DOL’s proposed rule focuses on updating the salary and compensation levels applicable to the white collar exemption. Specifically, the rule proposes that the standard salary level be set at the 40th percentile of weekly earnings for full-time salaried workers. This would raise the salary threshold from $455 a week ($23,660 per year) to $970 a week ($50,440 per year) in 2016.
The proposed rule also seeks to increase the total annual compensation requirement to exempt highly compensated executive, administrative and professional employees to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers ($122,148 per year). Currently, highly compensated employees are exempt if they earn at least $100,000 per year and regularly perform the duties of an exempt executive, administrative or professional employee. The DOL believes this proposed increase, like that for standard white collar workers, is imperative to ensure that each salary level test allows for the exemption from overtime of only bona fide exempt employees.
Lastly, the rule proposes a mechanism for automatically updating the salary and compensation levels going forward. The proposed rule will be published in the Federal Register, and comments will be accepted for 60 days following publication.
Impact on Employers
If the changes in the proposed rule become final, employers will be required to pay workers who earn as much as $970 a week ($50,440 per year) overtime for all hours worked over 40 in any workweek, even if those workers are classified as managers or professionals. Employers should not wait until the rule becomes final to plan for and implement reviews of the exempt/non-exempt statuses of their employees, and consider whether reclassification of employees is necessary.
Leech Tishman is available to assist your organization in submitting comments with respect to the proposed rule, and can also provide guidance on the potential impact of the changes proposed therein.
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