DOL’s New Overtime Rules: How Will The Proposed Regulations Impact Your Business?

The speculation is over — on June 30, 2015, the U.S. Department of Labor (DOL) published its long-awaited Notice of Proposed Rulemaking (NPRM) regarding overtime exemptions, after several missed release dates.  The NPRM is in response to President Obama’s March 13, 2014 memorandum directing the agency to update the existing Fair Labor Standards Act (FLSA) overtime regulations with the expressed intention of “simplifying” the rules while updating worker protections in light of the changing nature of the US economy.

“Overtime is a pretty simple idea,” the President said at a White House signing ceremony last year.  “If you have to work more, you should get paid more.” The President pointed directly to the white collar exemptions to the FLSA’s overtime requirements as needing revision, noting that the current rules treat as “highly paid” those employees earning as little as $23,660 per year.

Given the stated goal, the DOL’s NPRM does not disappoint.  In it, the DOL expressly states its intention to significantly increase the salary basis threshold for white collar exemptions, which will in turn raise the pay of millions of workers (the White House estimates nearly 5 million, in fact).  Employers are likely to have numerous questions about the 295-page NPRM and its potential impacts on their workforce. To help digest and process all of this information, we have provided key information in Question & Answer format.

Q1: Which employees are impacted immediately under the proposed rule?

A1: The proposed rule will directly impact any salaried employees currently classified by the employer as “exempt” salaried employees under the executive, administrative, professional, outside sales or computer employee exemptions, who are currently paid a salary that is more than $455/week ($23,660/year) but less than $921/week ($47,892/year).  Under the proposed rule, these employees would no longer be exempt, and would be entitled to overtime for all hours worked over 40 in each work week (and the final dollar amount for the salary test will likely be higher by the time this rule is finalized – see Q3 below).

Under the proposed rule, those classified as “highly compensated employees” (HCE), must earn at least $122,148 (rather than the current $100,000) in total annual compensation.

The proposed rule also impacts the movie industry – as the DOL proposes to increase the current base rate for those employees by approximately 102 percent – from $695 to $1,404 per week. 

Q2: Will there be any updates to the “duties” tests for the white-collar exemptions?

A2: While the NPRM does not include a direct proposed rule change, the DOL has stated it is considering whether changes to the “duties” tests for the individual exemptions are warranted.  The DOL is seeking comments – but don’t be surprised if there are changes to those tests in the final rule.

Q3: Will there be any more changes?

A3: Yes – the DOL has proposed creating a mechanism for automatically raising the salary basis threshold going forward.  Right now, the salary basis threshold is raised through the traditional rulemaking process.  However, the DOL notes the long time between increases and has proposed automatic updates so that the salary basis threshold stays at or near the 40th percentile of weekly earnings for full-time salaried workers (90th for highly compensated employees).

The DOL is considering two alternative methodologies for annually updating the salary and compensation thresholds. One is based on a fixed percentile of earnings for full-time salaried workers; the other on changes in the Consumer Price Index for All Urban Consumers (CPI-U).

The DOL projects that by 2016 the 40th percentile weekly wage in the final rule would likely be $970, or $50,440 a year.  As this final rule will likely not be issued and effective until 2016, employers should plan on this salary rate as the new standard.

Q4: Will this proposed rule impact exempt hourly computer professional employees?

A4: No.  Hourly computer professional employees who earn at least $27.63 per hour and perform certain duties are exempt under section 13(a)(17) of the FLSA and will not be affected by this proposed rule.  However, salaried computer professionals will be affected as described in Q1 above.

Q5: In what ways does the NPRM “simplify” the exemption rules?

A5: Well, the DOL basically says that it will be simpler for employers and employees to know who is and who is not exempt because there will be more automatically non-exempt workers.  Therefore, the employer will not have to waste time figuring out if those employees meet the “duties” test because salaries will exclude them from the exemptions.

Q6: Since the salary requirement is going up, will I be able to count discretionary bonuses, medical, disability, or life insurance, fringe benefits, retirement benefit contributions, etc. in reaching the $921/week threshold?

A6: Nope. The DOL specifically stated that it has not considered changing its exclusions to count these employer benefits toward the salary level requirement.

Q7: Is there anything employers can do right now?

A7: The DOL is accepting comments from interested parties, including employers, for 60 days.  We recommend that those who have particular concerns submit comments. Otherwise, employers should prepare as best they can for the change.

Q8: When will this rule go into effect?

A8: Given the notice period and administrative rulemaking process, it is not likely to be effective until 2016.

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