What Employers Need to Know
The Impact on “White Collar” Exemption Status
The Department of Labor (DOL) released a proposed rule on July 6, 2015 that; if enacted will significantly change the existing regulations governing which “white collar” workers are entitled to the Fair Labor Standards Act’s minimum wage and overtime pay protections. The proposed rule would change the salary level threshold that is required to classify an employee as “exempt” from the FLSA minimum wage and overtime pay requirements. The DOL estimates that 4.6 million workers who are “exempt” under the current regulations would (without employer intervention) become entitled to overtime pay under the new rules in the first year.
The Fair Labor Standards Act (FLSA) is a federal law that establishes certain labor standards, which includes minimum wage and overtime pay for certain employees in private sectors and governmental entities. Covered workers are classified as “nonexempt” workers. Employers are required to pay their nonexempt employees a minimum wage, as well as an overtime wage that is one and a half times the employee’s rate of pay, when work performed exceeds the established legal threshold of 40 hours per week. The workers classified as “exempt” employees are not covered by the minimum wage and overtime provisions and are often referred to as “white collar”. Under the current regulations, these “white collar” employees position (executive, administrative, and professional employees) are not entitled to overtime wages when their weekly wages are not below the established salary level threshold of $455 per week ($23,660 per year.)
On March 13, 2014, President Barak Obama signed a memorandum giving a directive to the DOL to update regulations that define which white collar workers have protections under the FLSA minimum wage and overtime standards. The President requested that the DOL look for ways to modernize and simplify the current regulations. The salary threshold has only been revised twice in that past 40 years and has not been updated since 2004 under the Bush administration. The White House fact sheet states that the current salary threshold is below the poverty threshold for a family of four and only 8 percent of full-time salaried workers fall below it.
The DOL proposed rule; “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees” three most significant key provisions are targeted to increase the salary and compensation levels needed for white collar employees to be classified as exempt. Specifically:
- Setting the standard salary level required for exemption at the 40th percentile of weekly earnings for full-time salaried workers (projected to be $970 per week in 2016, or $50,440 annually.
- Increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers ($122,148 annually); and
- Establish a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption.
The proposed rule is also seeking to simplify the identification of nonexempt employees, with the intention to make the executive, administrative and professional employee exemption easier to apply and easier to understand for both employers and workers. The DOL’s invited comments on the proposed rules and also sought comments on other items not slated for revisions under the proposed rule. Some of the issues the DOL asked for input on included the following:
- Should the current duties tests, used to determine employee exemption status be revised
- Whether employees should be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption
- To allow nondiscretionary bonuses to satisfy portion of required salary level
- In addition, “the Department is also considering whether to add to the regulations examples of additional occupations to provide guidance” on “how the general executive, administrative, and professional exemption criteria may apply to specific occupations.”
When to Expect Final Rule
The DOL anticipated having the final rule in place to be effective in the beginning of 2016, however, this appears to be delayed; though no official announcement has been made by the DOL on when we can expect a final rule. It is reported that the proposed rule comment period received 270,000 responses and the DOL would need time to read through them. The recently released Fall 2015 Agency Rule List for the DOL, by the Office of Management & Budget has the final rule timetable slated for July 2016.
What Steps can Employers Take Now?
Be prepared! The key advantage of a delay in the final rule to employers is having time to become familiar with the proposed changes and how they may impact your business. Planning ahead will help you ensure your business will have a smooth transition into any changes needed to be in compliance with the regulations when the final rule is enacted. Following these steps now will help you prepare:
-Learn more about the Proposed Rule and stay up to date with final rule developments
-Know state-specific regulations, if any that may need to be considered
- -Understand the impact the proposed changes may have on managing the workforce, labor costs and culture of your business
- -Perform internal FLSA audits; review current job titles and associated duties:
- -Ensure all current positions are accurately classified as exempt or nonexempt
- -Use the audit to help determine the level of impact of the proposed changes
- -Identify all positions that typically require more than 40 hours of service per week
- -Put an action plan in place to implement necessary changes and adjust according to new developments and final rule
Where Employers can Find More Details
To learn more about the DOL proposed rule and view additional helpful links to related fact sheets and FAQs, go to: http://www.dol.gov/whd/overtime/NPRM2015/
This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.