On June 30, 2015, the United States Department of Labor (“DOL”) proposed updating its current regulations governing which white collar workers (i.e., executive, administrative, and professional employees) are entitled to overtime pay under the Fair Labor Standard Act (“FLSA”). The DOL’s proposed changes primarily include raising the base salary thresholds from which overtime must be paid and providing automatic increases to these salary thresholds over time tied to the Consumer Price Index (“CPI”). The higher thresholds will expand eligibility of white collar workers to include an estimated five million additional workers by raising the minimum salary threshold to $50,440 per year by 2016.
Since 1940, the DOL’s regulations generally required three tests to be met to exempt white collar workers from the requirement that they be paid overtime compensation:
- Employee was paid a pre-determined and fixed salary not subject to reduction because of variations in the quality or quantity of work performed;
- Salary paid met a minimum specified amount, and;
- The employee’s job duties primarily involved executive, administrative, or professional duties.
Under current regulations, highly compensated employees (“HCE”) can also be exempted from overtime pay requirements if they earn total annual compensation of $100,000, perform office or non-manual work, and customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.
Under the new rules proposed by the DOL, the salary level required for white collar workers to be considered employees exempt from FLSA’s overtime requirements will be raised significantly. Specifically, the DOL proposes the following:
- Setting the standard salary level to $970 per week, or $50,440 annually (these are the amounts likely to be in effect, as the law calculates them, at the time the law goes into effect at the beginning of 2016);
- Increasing the total annual compensation requirement needed to exempt highly compensated employees to $122,148 annually, and;
- Establishing mechanisms to automatically update the salary and compensation levels moving forward (tied to C.P.I).
Rationale Behind Expansion
The DOL’s stated reasons in proposing these changes are to ensure that intended overtime protections are fully implemented and make the white collar exemptions easier to understand for both employers and workers. The DOL notes that the proposed rule will clarify overtime requirements for approximately 11,000,000 workers earning below the proposed salary threshold.
If the proposed rule becomes law, approximately 5,000,000 white collar workers, according to the DOL’s own estimates, will be newly entitled to overtime compensation. Additionally, approximately 6,000,000 white collar employees currently entitled to overtime will have their eligibility “clarified” because it will now be determined by the application of the new, bright-line salary test.
Changes to the Standard Duties Test?
The proposed regulations do not propose any specific changes to the Standard Duties Test (“SDT”) used to determine which white collar employees are subject to overtime exemptions. However, the DOL is seeking comments during a 60-day period after June 30, 2015 as to whether the current SDT is working as intended to screen out employees who are not “white collar” exempt employees. The DOL should issue further guidance after the 60-day comment period as to what types of changes may be proposed to the SDT.
Estimated Costs to Employers
The DOL estimates the average direct employer costs created by the proposed rule change will be somewhere between $239,000,000 to $255,000,000 per year. In addition to these direct employer costs, the rule will also translate to between 1.18 and 1.27 billion in additional higher earnings for employees who will now need to be paid overtime.
Impact In California
The impact of the DOL’s proposed changes in California may not be as significant as it will be in other areas of the Country. Due to the high standard of living, most public sector employees currently earn in excess of $70,000. Thus, raising the salary level to $50,440 may not have a significant impact on California’s public sector white collar employees. The largest portion of the impact, if any, will likely be felt in California’s private sector.
It will be important to monitor proposed changes to the SDT if they become part of the final DOL regulations. These possible changes to the SDT could create traps for unwary public sector employers even for white collar employees earning incomes well above the “bright-line” salary test of $50,440. LCW will continue to monitor the status of proposed changes after the 60 day comment period and notify in subsequent blog posts of any possible ramifications.