Susan Prince, J.D.

The public comment period for the Department of Labor’s (DOL) proposed changes to the overtime regulations ended on September 4th, 2015. Almost 250,000 comments were received, which represent the diverse views on the proposed changes - particularly the steep increase to the salary level required for exemption.

What has been proposed?

The DOL proposes to set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers. The DOL also proposes to automatically update the standard salary and com¬pensation levels annually, either by maintaining the levels at a fixed percentile of earnings or by updating the amounts based on changes in the CPI-U. This would raise the salary threshold to about $970 a week ($50,440 a year) in 2016.

In addition, the DOL proposes to increase the total annual compensation required to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers, which is $122,148 annually.

The public comments submitted represent the diverse and varying opinions of employees, employers, political parties, nonprofit organizations, labor unions, trade organizations, and more.

Various regions and industries

Many comments expressed opinions against the amount of the increase in the salary threshold, stating that the proposed salary threshold does not take into consideration the needs and specific circumstances of different industries and geographic regions. The largest impact would likely be on the lower level supervisors and managers especially in retail, hospitality, food service, office services, call centers, and other industries relying on lower paid supervisors and staff. First line supervisors and shift supervisors of housekeeping and food service employees in the healthcare setting may be affected by the salary level increase as well. Many of these employees would shift to the nonexempt category under the proposed regulations and would be entitled to overtime for any hours worked over 40 in a week.

The DOL invited comments during the comment period on whether the rule allowing exempt executives to concurrently perform both exempt and nonexempt work should be modified to avoid sweeping nonexempt employees into the exemption. Also, the DOL invited comments on whether a bright line rule stating that 50 percent of an employee’s time must be spent exclusively on work that is the employee’s primary duty should be adopted. Currently there is no specific time requirement. These changes in the final rules would greatly affect retail and hospitality managers who often perform nonexempt work in addition to their exempt duties.

Cost to employers

Many employers and employer groups submitted comments stating they felt the increase would place too costly a burden on employers.

In the proposed rules, the DOL estimates that average annualized direct employer costs from these changes will total between $239.6 and $255.3 million per year. In addition to the direct costs, this proposed rulemaking will also transfer income from employers to employees in the form of higher earnings. Average annualized transfers are estimated to be between $1.18 and $1.27 billion.

In the first year, the DOL estimates that 4.6 million workers exempt under the current regulations who earn at least the current weekly salary level of $455 but less than the proposed salary level of $921 would, without some intervening action by their employers, become newly entitled to overtime protection under the FLSA. Similarly, an estimated 36,000 currently exempt workers who earn at least $100,000, but less than $122,148, and who meet the minimal HCE’s duties test but not the standard duties test may also become eligible for minimum wage and overtime.

Employees submit a variety of comments

Many employees submitted comments to say they are in favor of the salary level increase because up until now they have been classified as exempt and are working well over 40 hours a week. They would welcome a new nonexempt status which included overtime for their extra work. Also, in certain cases employers may raise the salaries of a group of employees to the threshold for exemption in order to push these employees into the exempt category. This would be particularly beneficial in cases where the employee groups typically work more than 40 hours in a given week.

Additionally, the DOL estimates that 6.0 million salaried white collar workers who are currently entitled to overtime due to their job duties, and who earn at least $455 per week but less than the proposed salary level, would have their overtime protection strengthened because their exemption status would be clear based on the salary test alone without the need to examine their duties. This would reduce the number of overtime eligible workers potentially subject to misclassification as exempt by their employers.

On the other hand, employees who become nonexempt under the new rules are afraid they may see their hourly rates drop, so employers are not paying employees more overall when overtime pay is required. To offset increases in pay or increases in overtime costs, employers may be forced to reduce fringe benefits, such as health insurance contributions, 401(k) matching, vacation, or sick days. There may also be situations where employers adhere to a 40-hour workweek for certain employee groups, rather than paying them time-and-a-half in overtime pay.

Sly reference to changing the duties tests

There were many comments that also referenced the fact that the DOL did not propose actual changes to the duties tests, but only provided questions for consideration. The comments indicated that the DOL effectively gave the public nothing concrete and substantive on which to comment, and it would be unfair to then include changes to the duties tests in the final rules.

Annual updates too hard to budget

Another sticking point for many who submitted comments was the annual updating of the salary threshold. Employers felt they would not have enough notice of the salary level increase to budget for the following year. Some felt that an increase every three or five years would be easier for employers to handle.

Bottom line

Review your job descriptions now to determine whether they are still accurate, reflect the jobs being performed, and reflect the skills necessary to perform the job. Review employees’ actual job duties to ensure that they still fall within the administrative, executive, professional, computer, or outside sales exemptions. Determine which jobs are likely to shift categories under the DOL’s proposed regulations. Then make sure overtime for nonexempt employees has been properly calculated. Conducting a self-audit helps ensure compliance with federal and state laws.

Question:
An administrative, executive, or professional employee with total annual compensation of at least $100,000 is exempt without passing the full duties test if the employee:

1. Customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee
2. Earns at least $455 per week paid on a salary or fee basis
3. Has the primary duty of performing office or nonmanual work
4. Answers a and c
5. All of the above

Answer: d

Highly compensated employees (HCEs) are administrative, executive, or professional employees who earn at least $100,000 annually and customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee; earn at least $455 per week paid on a salary or fee basis; and have the primary duty of performing office or nonmanual work.

The employee's annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned. The employee's annual compensation may not include board, lodging, and other facilities; payments for medical insurance; payments for life insurance; contributions to retirement plans; or the cost of other fringe benefits.

If an employee's total annual compensation does not total at least the minimum amount by the last pay period of the 52-week period, the employer may, during the last pay period or within 1 month after the end of the 52-week period, make one final payment sufficient to achieve the required level. If the employee does not work a full year, the employee may still qualify for the exemption if the employee's pro rata portion of salary earned meets the salary requirement.

Additional Resources

• 2015 Changes to Overtime Regulations Resource Center
• The new FLSA regulations: What changed, what's next for employers
• FLSA Exemption Checklist
• DOL's proposed overtime regulations video: What you need to know
• Overtime Rules Calculator: 2015-2016