U.S. Dept. of Labor Publishes Proposed Revisions to FLSA Overtime Rules

After a months-long wait, the U.S. Department of Labor has published a Notice of Proposed Rulemaking (NPRM) regarding amendments to the Fair Labor Standards Act (FLSA) white collar overtime exemption rules. The NPRM was released on July 6, 2015, and outlines new exempt eligibility requirements.

In current practice, an employee’s status as “exempt” from overtime pay provisions could generally be determined by two methods: 1) the type of work performed by the employee, or the “duties test,” and 2) the amount/rate of salary the employee earns, or “salary basis test.” For example, employees who occupy executive, administrative, professional and outside sales roles and complete certain tasks could be exempt from the minimum wage and overtime provisions.

The U.S. DOL’s NPRM does not readdress the “duties test” aspect of exemption status, but instead revises the “salary basis test” by proposing a dramatic increase to the salary threshold.

Currently, a white collar worker must earn at least $455 per week (equaling $23,660 per year) and perform certain duties in order to be exempt from overtime regulations. The NPRM increases this threshold to $970 per week ($50,440 per year), which the DOL calculates to equal the 40th percentile of weekly earnings for full-time salaried workers. This threshold increase also applies to the “highly compensated” exemption rule, which exempts workers who perform only one or more of the tasks included in the “duties test” but earn at least $100,000 annually. The highly-compensated exemption threshold will be increased from $100,000 to $128,148 annually, representing the 90th salary percentile.

An important item to note is that these threshold dollar figures are not static rates, but would be automatically updated each year in one of two methods yet to be determined by the DOL: 1) keeping the thresholds tied to the 40th or 90th percentile of earnings, or 2) by adjusting the amounts for inflation by tying them to the Consumer Price Index. Therefore, employers may find it necessary to modify payrolls each year to ensure their employees are properly classified as exempt or non-exempt.

Impact on Employers

By increasing the overtime exemption threshold, the U.S. DOL estimates that overtime eligibility would then be granted to about 4.6 million workers, assuming employers do nothing in reaction to the rule changes. Although this implies a significant transfer of employer profits to employee paychecks, forecasting firms like Oxford Economics have already predicted that such a transfer of funding to increase overtime compensation is unlikely to happen, given that employers may restructure their workplaces by lowering hourly pay rates, cutting bonuses or reducing hours in order to work around the proposed amendments and mitigate labor cost increases.

Bottom Line

As of yet, these changes to FLSA remain in the proposal stage. From July 6, 2015 to September 4, 2015, the U.S. DOL will accept comments on the proposed ruling. Interested parties can leave feedback on the ruling, which will be considered prior to the final text and effective date being announced. The full text of the NPRM is available on the U.S. DOL website here. The proposed wage threshold changes are imminent; however, they will likely not come into effect until 2016. In the interim, employers can review the current salary levels of their exempt employees to plan for future labor budget adjustments, if necessary.

Action Items:

1. Interested parties can submit feedback on the NPRM prior to September 4, 2015 through the regulations.gov website here.
2. Review current salary levels of exempt employees for impact on labor costs, should the NPRM go into effect.
3. For further guidance, subscribers should call our HR On-Call Hotline at (888) 378-2456.