July 7, 2015

Expanding Overtime Protection - Department of Labor Proposes Substantial Increase to Minimum Salary Thresholds for Exemptions from Overtime Pay

Arnold & Porter Advisory

On June 30, 2015, the US Department of Labor (DOL) proposed changes to existing wage/hour regulations that would allow more salaried workers to qualify for overtime pay under the Fair Labor Standards Act (FLSA). The new regulations would significantly increase the minimum salary threshold for so-called "white collar" workers to be exempt from overtime under the FLSA's executive, administrative, or professional exemptions, from US$23,660 per year (US$455 per week) to a projected US$50,400 per year (US$970 per week) in 2016. Thus, most employees earning under US$50,400 per year would be automatically entitled to overtime under the FLSA, regardless of their duties or responsibilities.

To qualify as exempt from overtime under the FLSA's "highly compensated" exemption, employees would have to be paid US$122,148 per year (up from the current US$100,000 per year requirement), while still customarily and regularly performing at least one of the functions or duties required under the executive, administrative or professional exemptions.

According to the DOL, the salary level is the "best single test" of exempt status and prior salary levels were set too low and never kept up with inflation. By more than doubling the minimum salary for exemption, the DOL believes that it will provide overtime to almost five million additional workers and make it simpler for employers to identify employees who are and are not entitled to overtime.

For the first time, the DOL has also proposed automatically updating salary levels each year by tying them to annual salary benchmarks or inflation in order to ensure their effectiveness and prevent them from becoming outdated. Thus, the DOL is seeking comments on two alternative methods of updating the salary levels: (i) by tying the minimum and highly compensated thresholds to the 40th and 90th percentile of earnings for full-time salaried workers; or (ii) by updating both levels based on changes to the CPI-U (the Consumer Price Index for all Urban Consumers).

Interestingly, although the proposed regulations do not, at this time, modify the standard "duties" tests for exemptions, the DOL left the door open to additional possible changes by asking for comments on whether the duties tests should also be updated. Such revisions could include: (i) requiring exempt employees to spend a minimum specified amount of time performing their primary duty (for example, California currently requires that exempt employees spend at least 50% of their time performing their primary duty); and (ii) limiting the amount of non-exempt work that an exempt employee may perform.

On July 6, 2015, the proposed regulations were published in the Federal Register, officially beginning the 60-day comment period, after which the DOL will review the comments and publish a final rule with a future effective date. The precise timing of whether, and when, the final regulations could go into effect is still unknown as it is likely that Congress could attempt to delay or block the regulations. Nevertheless, employers should begin planning for possible enactment in 2016.

Although these proposed regulations would not change existing state and local overtime laws, employers subject to such laws (like employers in California and New York, for example) must comply with both federal and state/local laws. In states like California and New York this has not been a problem because the salary threshold for state overtime exemptions has historically been higher than the threshold under federal law. In other words, a salary that qualified for an overtime exemption under California or New York law also met the federal salary threshold under the FLSA. Under these proposed regulations, however, a salary that meets the threshold under California law (currently US$37,440 per year, rising to US$41,600 in 2016) or New York law (currently US$34,125, rising to US$35,100 in 2016) would not qualify for the white collar overtime exemptions under federal law.

Next Steps

The salary basis and duties tests were last updated by the DOL in 2004. At the time, the duties test had not been changed since 1949 and the salary basis test had not been updated since 1975. Not surprisingly, there has been an explosion in wage/hour litigation over the last decade, with federal court filings increasing virtually every year and reaching an all-time high in 2014 according to statistics released by the Administrative Office of the US Courts. Wage and hour litigation now represents the primary litigation risk for employers, and in addition to back pay, employees can collect 100% liquidated damages and attorneys' fees under the FLSA, making such actions particularly lucrative for plaintiffs and their attorneys.

Accordingly, to avoid potential future litigation, employers should be prepared to take quick and meaningful action in response to the DOL's regulations if and when they become final and should consider these steps:

  •  Identify all currently exempt employees who earn less than US$50,400 per year. For each exempt employee earning less than US$50,400 per year, consider whether it would be feasible or cost effective to: (i) raise their salary above the minimum threshold (assuming they continue to meet the duties test); (ii) reclassify them as non-exempt so that they are overtime-eligible; (iii) as part of any reclassification, adjust their salary to reflect the potential for overtime pay; or (iv) as part of any reclassification, reduce or manage their hours to minimize overtime pay.
  • Identify all currently exempt employees earning between US$100,000 and US$122,148 per year. For each employee earning under US$122,148 per year, carefully analyze their duties to ensure that they meet one of the more stringent white collar exemptions, and consider whether it would be cost effective to raise their total compensation to qualify for the highly compensated test.
  • Conduct or hire outside counsel to conduct a privileged wage-hour compliance audit, paying careful attention to exempt employees earning close to the minimum salary threshold. The best wage-hour audits include both a classification and a payroll and pay practices analysis, to ensure that employees are properly classified and that overtime is properly calculated and paid.
  • Carefully review and update job descriptions to accurately reflect job duties and responsibilities. Put in place proper procedures to ensure that new hires are appropriately classified and that hiring managers or Human Resources are properly trained on classifications.
  • Review and ensure that employee handbooks and any disciplinary and payroll administration policies comply with the FLSA, including its limitations on when deductions can be taken from salaries (as well as appropriate "safe harbor" language in the event of a mistaken deduction).
  • Continue to perform careful due diligence in connection with any corporate change, including an acquisition or merger, to identify any potential misclassification issues.
  •  Remember that state and local law may differ from and be more protective than the FLSA.
  •  Proactively discuss wage-hour classification and other issues with your outside employment counsel.


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