The DOL Announces Proposed Revisions to FLSA Regulations Doubling the Minimum Salary Requirement for Exempt Employees

More than 15 months after President Obama issued a Presidential Memorandum directing the Secretary of Labor “to propose revisions to modernize and streamline the existing [FLSA] overtime regulations,” the Department of Labor on June 30, 2015 finally issued a Notice of Proposed Rulemaking (NPRM) detailing its proposed revisions. These proposals include:

(1) Increasing the minimum salary requirement from $455 per week ($23,660 per year) to an expected $970 per week ($50,440 per year) in 2016;

(2) Increasing the minimum annual compensation requirement to qualify as a “highly-compensated” exempt worker from $100,000 to $122,148 annually;

(3) Creating a mechanism for automatically updating the minimum salary and compensation levels, by tying them to either (a) a fixed percentile of earnings for full-time salaried workers or (b) changes in the CPI-U (i.e., the Consumer Price Index for Urban Consumers).

Note that these are proposed revisions; they are not yet law. The NPRM will be published in the Federal Register and the public will be invited to comment on the revisions for a certain period (likely 60 days). After the comment period ends, the Department of Labor (DOL) may consider the comments; possibly make further revisions to the regulations; and publish a “Final Rule” in the Federal Register with an effective date on which it becomes law. Considering this timeline, it is likely that new regulations will not become law until mid-2016 or later. Usually, however, the “Final Rule” does not differ significantly from the NPRM, and thus employers now have a preview of the regulatory landscape they will face in 2016.

The DOL was widely expected to raise the minimum salary requirement, which has not been updated since 2004. However, most predicted that the DOL would couple a more modest (but still significant) increase with changes to the various “duties tests.”  This speculation was based upon remarks made by the president and the Secretary of Labor indicating a concern that too many employees, particularly retail managers, were exempt under the regulations even though they spent a large portion of their time performing non-exempt duties.

The DOL has not, however, proposed any specific revisions to the duties tests. Essentially, the DOL seems to believe that a dramatic increase in the minimum salary and compensation requirements will, standing alone, ameliorate concerns about potential misclassification, noting in the NPRM that “[a]djusting the salary level upward to account for the absence of a more rigorous duties test will ensure that the salary threshold serves as a more clear line of demarcation between employees who are entitled to overtime and those who are not, and will reduce the number of white collar employees who may be misclassified . . .”

Even though the DOL has proposed fewer revisions than expected, it is nonetheless “seeking comments” on other potential changes. For example, the DOL has reiterated the concern that “in some instances the current tests may allow exemption of employees who are performing such a disproportionate amount of nonexempt work that they are not [white collar] employees in any meaningful sense” and it is thus “seeking comments on whether the [duties] tests are working as intended.” Similarly, it seeks comments on whether to allow nondiscretionary bonuses and incentive payments to satisfy a portion of the salary basis test. Revisions to the regulations in these areas may possibly appear in the Final Rule.

Although a Final Rule will not take effect until 2016, employers should now start evaluating their employee classification policies to ensure compliance with, at the least, the expected increase in the minimum salary requirements. Given the magnitude of the increase, it’s likely that most employers will need to transition some employees, for whom meeting the new salary basis test is not feasible, from a salary to hourly role.

Should you have questions about this alert, please contact the authors or any other member of Drinker Biddle’s Labor and Employment Group.

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