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The Long-Awaited Department of Labor Proposed Rule Revising the White Collar Overtime Pay Exemption

July 1, 2015

On June 30, 2015, the Department of Labor (DOL or the Department) published a proposed rule modifying the “white collar” exemption to the Fair Labor Standards Act’s (FLSA) minimum wage and overtime pay requirements. In particular, the proposed rule significantly increases the salary thresholds at which employees would qualify for the exemption and proposes a mechanism to automatically update the compensation thresholds. A 60-day comment period will follow the rule’s forthcoming publication in the Federal Register.

Under the FLSA, employers are obligated to pay employees a certain minimum wage (currently $7.25 per hour) and overtime pay at a rate of not less than one and one-half times the employee’s regular rate for hours worked over 40 in a workweek, unless an exemption applies. The white collar exemption excludes certain executive, administrative, professional, outside sales, and computer employees from the overtime pay requirements. Currently, to qualify for the exemption, the white collar employee generally must: (1) be salaried, meaning that they are 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) be paid more than a specified salary threshold, which is currently $455 per week (the equivalent of $23,660 annually for a full-year employee) (the “salary level test”); and (3) primarily perform executive, administrative, or professional duties, as provided in DOL’s regulations (the “duties test”). In addition, the exemption excludes “highly compensated” employees, who are paid a total annual compensation of at least $100,000 and customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.   

Through the rule, DOL seeks to update the salary thresholds at which employees qualify for the white collar exemption, simplify the identification of nonexempt employees, and establish a mechanism to automatically update the compensation thresholds. Among other changes, the rule would: 

  • Set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers. Using 2013 data, the proposed salary amount increases the threshold to $921 per week, or $47,892 annually. Should DOL decide after consideration of comments received on the proposed rule to set the standard salary level in the final rule at the 40th percentile of weekly earnings of full-time salaried workers, the Department estimates that a 2016 level may be about $970 a week, or $50,440 a year. As DOL explains in the proposed rule, it believes this amount will adequately distinguish between employees who meet the duties requirements of the white collar exemption and those who likely do not, without necessitating a return to the more involved duties test it has adopted in the past. In addition, because it reduces the number of workers for whom employers must apply the duties test to determine exempt status, the threshold simplifies the exemption. 
  • Set the highly compensated employee annual compensation level equal to the 90th percentile of earnings for full-time salaried workers. Therefore, the total annual compensation requirement needed to exempt highly compensated employees under the proposed rule increases to $122,148 annually. The Department believes that this compensation level will ensure that the highly compensated employee exemption continues to cover only employees who almost invariably meet all the other requirements for exemption. 
  • Include in the regulations a mechanism to automatically update the salary and compensation thresholds on an annual basis to prevent the levels from becoming outdated. DOL last updated the salary levels in 2004 and, in response to commenter concerns that the thresholds would grow outdated, expressed an intent to “update the salary levels on a more regular basis.” In this proposed rule, the Department proposes to update the compensation levels either by maintaining the levels at a fixed percentile of earnings, which is the same methodology proposed to update the standard salary level in the rule, or by updating the amounts based on changes in the Consumer Price Index for All Urban Consumers (CPI-U). DOL specifically seeks comments on whether one approach is better suited to maintaining the effectiveness of the salary level test.               

Notably, the Department did not propose specific revisions to the standard duties test. However, DOL seeks comments on whether the duties tests are working as intended to screen out employees who are not bona fide executive, administrative, professional, outside sales or computer employees. Possible revisions include requiring exempt employees to spend a specified amount of time performing their primary duty (e.g., a 50 percent primary duty requirement as required under California state law) or otherwise limiting the amount of nonexempt work an exempt employee may perform, and adding to the regulations additional examples illustrating how the exemption may apply to particular occupations. 

Most employers will be affected by the changes to the FLSA regulations, especially those in the professional and business services industry. Employers should consider whether it would be beneficial to submit comments in order to help shape the final rule. Wiley Rein is available to assist in such an effort. Regardless, in light of the proposed rule, employers must remain aware of their obligations to properly classify employees under the FLSA and make wage payments consistent with those obligations. Government contractors in particular should take note that violations of the FLSA are included in the types of violations contractors are required to report under the proposed rule and guidance implementing Executive Order 13673 “Fair Pay and Safe Workplaces.” Employers should consult with counsel early to establish compliance in preparation for the final rule.