In July, the Department of Labor (DOL) issued proposed regulations that double the current threshold salary amount for employees to be exempt from DOL's overtime regulations. The new regulations are expected to dramatically increase the number of employees entitled to overtime compensation.
The Fair Labor Standards Act (FLSA) requires employers to pay employees at least 1 1/2 times their regular hourly compensation for all time worked in excess of 40 hours in any one workweek. Only if properly classified as "exempt" under FLSA regulations is an employee not entitled to overtime compensation.
Since it was enacted in June 1938, the FLSA has had exempted employees employed in bona fide executive, administrative or professional capacities. The exemption, known as the EAP, or white-collar, exemption was intended to apply to well-compensated white-collar employees who did not need the protection of FLSA's minimum wage and overtime requirements. Employees who meet the criteria set forth in DOL regulations are not subject to FLSA's minimum wage or overtime requirements. There also is an exemption for outside salespeople and skilled employees working in the computer field.
EAP exemption
Since 1940, FLSA regulations generally have required each of the following three tests to be met for the EAP exemption to apply:
In its July 2015 proposal, DOL proposed to set the salary level test equal to the 40th percentile of earnings for full-time salaried workers. Assuming the new regulation goes into effect in 2016 as expected, an employee's weekly salary in 2016 would need to be at least $970, equivalent to an annual salary of $50,440, for the employee to be potentially exempt from FLSA's overtime requirements. The current salary threshold to be eligible for the exemption, which has been in place for 11 years, is $455 per week, equivalent to an annual salary of $23,660. The current salary level is less than the 10th percentile of full-time salaried employees and is below the poverty threshold for a family of four.
DOL estimates the proposed new regulation will affect nearly 4.7 million employees working in an estimated 290,800 establishments.
President's initiative
DOL's proposal was in response to a Presidential Memorandum issued in March 2014 by President Obama who directed the agency to update and simplify FLSA overtime regulations. The DOL proposal is part of President Obama's high-priority middle-class economic plan intended to strengthen the middle class, expand opportunity and grow the economy.
When the proposal was announced, the president said: "Right now, too many Americans are working long days for less pay than they deserve. That's partly because we've failed to update overtime regulations for years—and an exemption meant for highly paid, white-collar employees now leaves out workers making as little as $23,660 a year—no matter how many hours they work."
Upon issuing the proposed rule, DOL cited as examples a convenience store manager, fast food assistant manager and some office workers who receive compensation as low as $23,660 per year and who may be expected to work 50, 60 or more hours per week without receiving any overtime compensation.
Critics of the proposal say it will limit flexibility and opportunity in the workplace and negatively affect job growth and career advancement for ambitious low-wage workers. A report from the National Retail Federation, which is part of a coalition opposing an expansion of employees entitled to overtime, states overtime regulations are unlikely to significantly increase employees' take-home pay because employers are likely to implement changes to control costs. Because more entry-level and lower-level professional, managerial and administrative employees would be eligible for overtime pay with a higher salary threshold for the EAP exemption, fewer opportunities for advancement would exist as the number of midlevel salaried positions decreases, according to the National Retail Federation report.
Salary level test
The salary level test has been updated seven times, most recently in August 2004. DOL considers the salary level test as the best single test of exempt status and believes setting the salary level at the 40th percentile of weekly earnings for full-time salaried employees is an appropriate point to demarcate employees who would not be entitled to overtime compensation.
To keep the salary level test current, DOL wants the salary level adjusted annually to be either at the 40th percentile or adjusted according to the consumer price index for urban communities. DOL believes setting the salary level test at the 40th percentile of all full-time salaried employees will set a salary threshold that adequately distinguishes between employees who are most likely to meet the duties requirements of the EAP exemption and those who likely do not without having to return to the more detailed, longer test used before 2004 to evaluate an employee's duties.
DOL indicated it wants to simplify FLSA overtime regulations by placing more emphasis on salary level to distinguish between exempt and nonexempt employees rather than having to undertake a more detailed analysis of an employee's duties and how an employee's time is spent.
To the surprise of many, the July 2015 DOL proposal did not include any proposed changes to the current duties test. In its Notice of Proposed Rulemaking, DOL expressed concern that many employees who are classified as exempt are performing a disproportionate amount of nonexempt work and invited comments regarding whether changes should be made to the duties test and whether the test should include a requirement that a minimum percentage of exempt work be required. The comments will be considered in the promulgation of a final rule.
Current duties list
Under current FLSA regulations governing overtime, an exempt executive employee must meet the salary level test and have a primary duty of managing the enterprise or managing a customarily recognized department or subdivision of the enterprise. An exempt executive also must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent and have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion or other changes in the statuses of employees must be given particular weight.
An exempt administrative employee must meet the salary level test and have a primary duty of the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers. An exempt administrative employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
An exempt professional employee must meet the salary level test and have a primary duty of one of the following:
An exempt professional employee must perform work requiring the consistent exercise of discretion and judgment or require invention, imagination or talent in a field of artistic endeavor.
Outside sales personnel also are exempt from FLSA's minimum wage and overtime regulations. To qualify for the exemption, an exempt outside salesperson must be customarily and regularly engaged away from the employer's place or places of business and have a primary duty of making sales or obtaining orders or contracts for services or for the use of facilities. There are no salary or fee requirements for exempt outside employees.
The exemptions apply only to "white-collar" employees who meet the salary and duties tests. Regardless of the amount they are paid (their compensation may be well in excess of the salary level test), nonmanagement employees in production, maintenance, construction and similar occupations, manual laborers and other "blue-collar" workers who perform work involving repetitive operations with their hands are entitled to overtime pay.
Some states have stricter exemption standards than DOL's regulations. FLSA does not pre-empt stricter state standards. Just as some states have adopted minimum wage rates higher than the current $7.25 per hour federal minimum wage, some states already have more rigorous standards for an employee to be exempt from overtime requirements. In California, for example, an employee must receive an annual salary of at least $37,440 and spend more than 50 percent of his or her time on exempt duties to be exempt. The salary to qualify for the computer professional exemption in California is $84,130.53.
Enforcement
Employers bear the burden of establishing the applicability of any exemption. Job titles and job descriptions do not determine exempt status nor does paying a salary rather than an hourly wage. Many employers mistakenly believe paying a salary rather than hourly wages automatically disqualifies an employee from entitlement to overtime compensation regardless of the duties performed.
Many employers who pay their employees twice per month or biweekly also mistakenly believe they only are required to pay overtime to nonexempt employees who work more than 80 hours in a biweekly pay period. To the contrary, DOL regulations require employers to establish a workweek, which is defined as seven consecutive 24-hour periods, and that each workweek stand alone. A nonexempt employee must be paid overtime at 1 1/2 times his or her regular rate of pay whenever the employee works more than 40 hours in the workweek. If the employer fails to do so, the employer is liable not only for paying the past due overtime, but also for double the amount owed to the employee as liquidated damages. The employer also may be liable for the employee's attorney's fees.
In addition to the basic salary level test for the EAP exemption, current DOL regulations have a separate category applicable to highly compensated employees. If an employee receives a salary above a certain amount, the employee is subject to an easier duties test to be exempt. The current highly compensated employee annual salary exemption is $100,000. In its proposal, DOL has proposed the standard for highly compensated employees be set at the 90th percentile of earnings for full-time salaried workers, which currently is $122,148, and, similar to the basic salary level test, it should be automatically updated each year.
How it affects you
Using 2013 data, DOL estimates there are 128.5 million workers in the U.S. who are subject to FLSA and most of these workers are covered by FLSA's minimum wage and overtime pay regulations. DOL estimates 43 million of these workers are white-collar salaried employees. Of these workers, DOL estimates 21.4 million are currently exempt EAP employees. Lower to midlevel managers who spend a substantial portion of their time on nonexempt work are expected to be the employees primarily affected by the proposed increase in the salary level test.
According to DOL's data, 155,770 workers in the construction industry from 15,100 construction establishments will be affected by the new regulation. The most affected industries are education and health services and wholesale and retail trade employees.
The National Association of Home Builders (NAHB) has estimated more than 110,000 construction supervisors would be eligible for overtime compensation based on the proposed new rule. Following issuance of the proposed rule, NAHB issued a statement expressing concern that changes to the current overtime salary exemption would reduce job-advancement opportunities and the hours of full-time construction supervisors, leading to construction delays, increased costs and less affordable housing options for consumers.
NAHB believes doubling the salary threshold to be eligible for exempt status is unlikely to result in an increase in take-home pay and will force business owners to structure their workforces to compensate by scaling back on pay and benefits, as well as cutting hours to avoid the overtime requirements. NAHB requested a 90-day extension to the comment period to submit its objections.
Unless there is an extension of the 60-day public comment period, public comments on the proposed new overtime rules were to be submitted by Sept. 4. Once finalized, the new regulations are expected to go into effect in 2016.
What to do now
When preparing company budgets and estimates for projects in 2016, you will want to consider whether the proposed new salary level threshold will affect your company. If you have employees whom you have historically considered exempt from FLSA overtime requirements and their salary in 2016 will be less than $970 per week or $50,440 annually, the new regulation is likely to affect you and will require that those employees be paid overtime. DOL is expected to issue a final regulation before the end of the year.
Stephen M. Phillips is a partner with Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.
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