Commentary: The U.S. Department of Labor released a highly anticipated proposed new rule that will significantly broaden federal overtime protection for employees. Secretary of Labor Thomas Perez has said, “the proposed overtime rule goes to the heart of what it means to be middle class in America.” Indeed, by the DOL’s own calculations, roughly 25% of all exempt employees in the country will be rendered nonexempt and eligible for overtime pay under the proposed rule.
What will the proposed rule mean for your organization? For one, it will make it more difficult to classify employees as exempt, which means employers will have to pay more overtime. And even for jobs that remain properly classified as exempt, employers may have to pay a higher weekly salary to meet exemption requirements. Employers must start planning for these changes now.
The Fair Labor Standards Act, which covers nearly all employers, is a federal law that generally requires employers to pay all employees minimum wage plus overtime, which is calculated at one and a half times the regular rate of pay. However, according to the DOL’s current regulations, certain “white collar” jobs are exempt from the overtime requirement. For these jobs, employers need not pay overtime and, instead, can simply pay a set salary of at least $455 per week ($23,660 annually) for all hours worked if an employee also performs certain executive, administrative, or professional job duties. For a variety of legitimate business reasons, paying a set salary appeals to many employers.
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In March 2014, President Obama directed the Secretary of Labor to modernize and streamline existing overtime regulations for exempt executive, administrative, and professional employees. This was driven by the President’s view that the compensation paid to these employees has not kept pace with America’s economy since the DOL last revised pertinent regulations in 2004. In particular, the President noted that the minimum annual salary level for these exempt classifications under the 2004 regulations of $23,660 was below the poverty line for a family of four.
What is in the proposed rule?
Most significantly, the proposed rule calls for raising the minimum salary level for white collar exemptions from $455 a week to $921 a week ($47,892 a year). In addition, the DOL expects to revise the minimum salary level to $970 a week ($50,440 a year in 2016) when it issues its final rule. The DOL estimates that this change would result in:
• 4.6 million currently exempt employees losing their exemption right away.
• Another 500,000 to one million currently exempt employees would lose their exempt status over the next 10 years as a result of automatic increases to the salary threshold.
Related changes in the regulations include increasing the annual compensation threshold for exempt highly compensated employees from the present level of $100,000 to a proposed $122,148.
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The proposed rule acknowledges that roughly 25% of all employees currently exempt and subject to the salary basis requirement will be rendered nonexempt under the proposed regulations. The DOL recognizes that employers are likely to reduce the working hours of currently exempt employees reclassified as a result of these regulations, and that the reduction in hours will probably lead to lower overall pay for these employees.
More changes possible?
The DOL may make additional key changes to the overtime regulations that could impact some employers. Specifically, the proposed rule invites the public to comment on a wide range of topics, including:
• Whether to allow nondiscretionary bonuses to satisfy some portion of the required salary level, including the appropriate frequency of such bonuses.
• Whether to allow commissions to satisfy some portion of the required salary level.
• Whether to modify the current duties tests for exempt status.
• The best way to determine annual updates to the salary levels in the regulations.
Unfortunately, it is unclear when, or even if, the DOL will make changes on any of these topics. As a result, the employer community continues to hold its collective breath.
What comes next?
The proposed rule is not final, as it is subject to a 60-day public comment period, which ended Sept. 4. The DOL is reviewing the feedback and considering whether changes to the proposal should be made – a process that could take several months. If the DOL moves forward with a final rule, more than likely it won’t be published until 2016. After the DOL issues the final rules, employers will likely have some lead time before the rules take effect.
If the rules are implemented, employers can prepare by doing the following:
- Budget for salary increases and/or increased overtime costs.
- Understand that, in response to the new proposed rules, some states might update their salary threshold as well.
- If this is the case, covered employers must comply with the higher minimum salary requirement.
- Where federal, state or local laws differ, employers must follow the law that is more generous to the employee.
- Keep in mind that the publicity surrounding any changes would likely increase attention on the issue and could result in more complaints – both under the old rules and new rules.
In the meantime, employers who continue to monitor for expected change in the FLSA landscape will be one step ahead of those who are uneducated and ill-prepared for any changes coming down the pike.
Tom Perrotti is president of ADP’s major account services and ADP Canada organizations, which provide human capital management services to businesses with 50 to 1,000 employees across the U.S. and Canada.
