Client Bulletins
Proposed Overtime Rule Would More Than Double Salary Threshold for Exempt Employees, With Automatic Yearly Increases

No changes proposed to “duties test” - Client Bulletin #561
July 1, 2015

On June 30, the Wage and Hour Division of the U.S. Department of Labor released its long-awaited Notice of Proposed Rulemaking, proposing changes to the executive, administrative, professional, and highly-compensated employee exemptions from the overtime requirements of the Fair Labor Standards Act. In addition to the Notice, the Department has also issued a Fact Sheet and list of Frequently Asked Questions.

The following are, at first glance, key highlights of which all employers should be aware.

The Salary Test

Although the proposed rule is 295 pages long, the only substantive changes are in the weekly salary that must be paid in order for an employee to qualify for the executive, administrative, and professional exemptions to the FLSA overtime requirements, and in the annual compensation that must be paid for an employee to qualify for the “highly compensated employee” exemption.

The current salary threshold for the executive, administrative, and professional exemptions is $455 a week ($23,660 a year). This figure was last updated in 2004. The Department proposes to set the minimum weekly salary at the 40th percentile of weekly earnings for all full-time salaried employees. Assuming that a Final Rule is issued in 2016, the minimum weekly salary for the white collar exemptions would be $970 a week ($50,440 a year), more than double the current threshold. The effect of this change, of course, would be to dramatically increase the number of salaried employees who are entitled to overtime pay. According to an editorial by President Obama about the proposed rule, approximately 5 million more employees nationwide would qualify for overtime if the proposed rule is adopted.

While the increase to the minimum weekly salary was expected, what was more of a surprise is the Department’s proposal, for the first time since the Fair Labor Standards Act was passed in 1938, to automatically increase the minimum weekly salary requirement each year based on data from the Bureau of Labor Statistics. The Department, however, has not chosen between the two different indexing methods that it has studied and has solicited comments on the indexing process.

Likewise, the Department proposes to increase the minimum annual compensation for the highly-compensated employee exemption. The current minimum is $100,000. The Department proposes to increase that figure to $122,148 a year for 2016. The Department proposes that this figure be increased annually based on the same index that would apply to the weekly salary requirement.

No Change to Duties Test

Many commentators had also predicted that the Department would propose changes to the so-called “duties test” for the executive, administrative, and professional exemptions, including the adoption of a California-style requirement that 50 percent of an exempt employee’s time each week be devoted to performing exempt tasks. In an interesting turn of events, the Department has solicited comments regarding the respective duties tests but has not proposed any specific regulatory changes at this time.

It remains to be seen what the Department will do as to the duties tests. By choosing not to include any proposed amendments regarding the duties tests in the Notice, the Department may have foreclosed its ability to make regulatory changes without further notice and comment. On the other hand, the solicitation for comments may indicate that the Department is considering issuing a second round of proposed amendments, and opening up a second comment period, at a more opportune time in the future.

What Happens Next?

The Notice is expected to be formally published in the Federal Register in the next few days, and President Obama is scheduled to publicly comment tomorrow. The Federal Register publication will provide the timeframe during which written comments will be accepted, which should be at least 60 days. Comments may be submitted during that time at http://www.regulations.gov.

For now, these are just proposed changes to the regulations.  The regulations have not changed, and employers are not required to take any action at this time.

We will issue additional bulletins as needed as we continue to analyze the proposed rule.  Stay tuned for additional updates from the Constangy Wage & Hour team!

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