Indecent proposal: Proposed increases to what employees must be paid to continue to be exempt from overtime under the FLSA

Posted on 07/01/2015 at 09:33 AM by Jill Jensen-Welch

On June 30, 2015, the Department of Labor announced its Notice of Proposed Rulemaking (NPRM) affecting certain white collar exemptions to the Fair Labor Standards Act (FLSA).  The proposal responds to President Obama's March 2014 Presidential Memorandum directing the DOL to modernize and simplify these regulations to insure a fair day's pay for a fair day's work.  The 295 page (double-spaced) proposal is aimed primarily at increasing the minimum salary level that must be paid in order for certain workers to be considered exempt from the overtime provisions of the FLSA; a test which the DOL has repeatedly said is the best single test of exempt status.   Increases to this test have occurred seven times since the FLSA became law in 1938. Positions Affected

  1. Executive, Administrative, and Professional (EAP) Employees

Not to be confused with Employee Assistance Programs, the proposed regulations are primarily aimed at employees exempt from the overtime provisions of the FLSA under these three white collar exemptions—for short, EAP employees.  Get used to this acronym; it is used extensively by the DOL.

Out with the Old:  The current minimum salary level to be paid to achieve and maintain an EAP exemption is $455/week or $23,660/year.

In with the New:  First, the minimum salary level is proposed to increase in 2016 to the 40th percentile of the Bureau of Labor Statistic’s measure of earnings of full-time salaried workers.  The DOL estimates that in 2016, that will be approximately $970/week or $50,400/year.  Second, the DOL intends to institute a mechanism that will automatically increase this number on a periodic basis.  The proposal offers two options and seeks comments on which option is preferred, how frequently to change it (DOL seems to prefer annually), and when increases would be effective (e.g., January 1, anniversary of these regulations being effective).  One option is to maintain a fixed position at the 40th percentile of full-time salaried workers' earnings; the other is to index the increases to the Consumer Price Index-US (CPI-U).  Both figures are already maintained and regularly reported by the DOL's Bureau of Labor Statistics. Several states have indexed minimum wage increases in similar ways.  The DOL tries to sell this part of its proposal to employers by saying it will reduce dramatic increases in the minimum salary—like this proposal, which more than doubles  the minimum salary level and it will provide employers with certainty.

Difficulties:  While virtually all employers will be impacted by these regulations should they become final, small employers, non-profit organizations, and industries with traditionally lower-paid workers (e.g., service and retail) will struggle the most.  Further, this salary test does little to account for wage variations based on geography.  The DOL estimates that 4.6 million workers will not meet this newly proposed minimum salary level to remain exempt from overtime.  Employers will either have to raise salaries to maintain exempt status, or revert to nonexempt status, and begin tracking hours and paying overtime for these workers.  DOL also opines that having less exempt workers because of a higher and objective salary level test, will reduce misclassification litigation.  This fails to consider the probability of increased litigation over what is compensable work time for mid-level white collar workers who are newly nonexempt.  They are used to carrying electronic devices tied to employer email systems, reading industry or professional literature while off-duty, attending professional conferences and seminars, traveling for work or work-related events, and the like.

Foreshadowing:  DOL is seeking comments on several issues that are not addressed in this proposal.  DOL is “considering” whether to revise the duties tests on the EAP exemptions, and it is seeking comment on that in this NPRM, including examples of occupations that would be exempt (or nonexempt).  DOL is also “considering” whether to allow nondiscretionary bonuses and incentive payments (although it is unlikely DOL would include commissions) to be counted toward the minimum salary level.  This was one of the items on employers’ wish lists, the rest of which the DOL appears to have bypassed in favor of employees’ wish lists.  Comments on this are also sought in this NPRM.  Finally, recognizing the problems posed by the electronic age on the work of exempt employees who will inevitably become nonexempt, the DOL indicates it is “considering” issuing a request for information in the future regarding compensating nonexempt employees who work remotely on electronic devices.  To be proactive, employers could begin addressing those concerns in comments to the DOL.

  1. Highly Compensated Employees (HCE)

Out with the Old:  This FLSA-exempt category was added to the regulations in August 2004.  It requires a minimum annual compensation of $100,000 that can be made up of salary, commissions, and bonuses, but must be paid at least $455/week so that the pay is somewhat regularized.  It also requires the job to meet at least one of the elements of a white collar exemption duties test.

In with the New:  First, the minimum salary is proposed to increase in 2016 to the 90th percentile of the Bureau of Labor Statistic’s measure of earnings of full-time salaried workers.  Based on 2013 numbers, that would be $122,418.  The DOL does not provide an estimate as to what that number may be in 2016 when the final regulations would go into effect, perhaps because it may be subject to more variability.  Second, the DOL intends to institute a mechanism that will automatically increase this figure similar to that used for EAPs—either maintaining the 90th percentile or indexing to the CPI-U.

Mortgage Loan Officer Alert:  The DOL upset the apple cart in 2010 when it reversed course in an Administrative Interpretation, stating that most mortgage loan officers were nonexempt.  The Mortgage Bankers Association then instituted litigation, which effectively put the DOL’s interpretation on hold—at least in the minds of many banks and other financial institutions.  Earlier this year, in Perez vs. Mortgage Bankers Association (Mar. 9, 2015), the U.S. Supreme Court held that the DOL’s interpretation was validly issued.  Those employers with mortgage loan officers that had not been changed to nonexempt were forced to convert at that point.  But those with MLOs paid more than $100,000 per year were able to maintain their exempt status using the highly compensated exemption.

Difficulties:  The increase in the HCE minimum annual compensation will impact more than financial institutions with mortgage loan officers, however.  The DOL estimates that 36,000 workers will not meet this newly proposed minimum.  Employers will either have to raise salaries to maintain exempt status, or revert to nonexempt status.  That means workers who are paid more than six figures annually will be required to track their hours of work.  It also means employers will be required to pay them overtime of 1.5 times their regular rate of pay, which rate includes their commissions and bonuses, whenever they work over 40 hours in a workweek.

Positions Not Affected By and large, the only categories of FLSA-exempt employees who are not affected by the DOL’s proposed regulations are those the DOL cannot change because of statutory provisions put into the FLSA over the years by Congress. This includes:

  • Outside Salespersons. (There is no minimum salary test for this exemption, only a duties test. 29 C.F.R. § 541.500)

  • Computer Professionals. (One of the three methods of meeting this minimum salary test, by hourly pay, is set by statute at $27.63/hour.  29 U.S.C. § 213(a)(17))

  • Teachers and academic administrative personnel in elementary and secondary schools. (These positions are specifically exempted in the statute.  29 U.S.C. § 213(a)(1))

  • Doctors, lawyers, and judges are specifically exempted from the FLSA (29 C.F.R. §§ 541.303-304), and the NPRM indicates no plan to deviate from that rule.

Actions Hold: Consider freezing salary increases for all exempt employees until after these regulations become effective in 2016.  Save your pennies, instead, for what you'll have to pay then in increased salaries to maintain exempt status for some and to overtime for the rest who must be converted to nonexempt status.  In addition, increases to exempt employee pay may inflate the BLS’ 2015 statistics, which will be the basis for setting the minimum salary level increase for 2016. Comment:  Want to try to influence these regulations and others that are sure to come?  Make your voices heard.  The period to submit comments to the DOL on these proposed regulatory changes will end 60 days after the NPRM is published in the Federal Register which will happen in the next couple of days.  If the past is prologue, the DOL won’t likely change its course much based on employer input.  However, if a flood of employers and employer groups submit critical and constructive comments, the DOL may be forced to take more time to wade through them. 

In addition, themes from the comments will at least be mentioned in the release of the final regulations and it will be interesting to see how the DOL justifies rejecting them in favor of the supportive comments employee groups will no doubt submit. Analyze:  Run the numbers.  How many of your currently exempt EAP employees fall below the estimated minimum salary level of $50,400/year?  How many of your currently exempt HCE employees fall below the estimated minimum level of $122,418/year in total compensation?  How many of these are far enough below the estimated new minimums that reversion to nonexempt status is the only viable option?  How many are close enough that you would consider raising their pay to maintain the exemption—at least for 2016? Prepare: These regulations are very likely going to be finalized, largely as proposed, so you just as well get ready for the inevitable. 

Plan the content of 2016 meetings where you will notify newly nonexempt employees of the change, and train them how to report their work hours, what constitutes compensable work, and what is overtime.  Who will be invited to these meetings cannot be determined until after the final regulations are issued, but you will probably have 30 days before the new regulations become effective to figure that out and hold your training.  That does not preclude you from getting the content together in advance so your meetings are plug-and-play.  Also, because the number of nonexempt employees will be greatly increased (and along with that, liability for improperly paying them will also be greatly increased), train your managers.  Reinforce/remind them how to properly handle work hours and overtime for all of their nonexempt employees. 

For more information on the proposed regulations and how they may impact your business, or for assistance in submitting comments to the DOL, contact any attorney in the Dickinson Labor and Employment section.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

Jill Jensen-Welch

 

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The material, whether written or oral (including videos) that is posted on the various blogs of Dickinson Law is not intended, nor should it be construed or relied upon, as legal advice. The opinions expressed in the various blog posting are those of the individual author, they may not reflect the opinions of the firm.  Your use of the Dickinson Law blog postings does NOT create an attorney-client relationship between you and Dickinson, Mackaman, Tyler & Hagen, P.C. or any of its attorneys.  If specific legal information is needed, please retain and consult with an attorney of your own selection.

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