The U.S. Department of Labor Proposes Changes to the Overtime Regulations

On June 30, 2015, the Wage and Hour Division of the U.S. Department of Labor used its rule making authority to propose changes to the existing overtime regulations that President Obama announced would make "up to five million more people eligible to receive overtime pay from their employers." The Department is proposing to update the regulations governing which executive, administrative, and professional employees (white collar workers) are entitled to the Fair Labor Standards Act’s minimum wage and overtime pay protections. The Department last updated these regulations in 2004, and the current salary threshold for exemption is $455 per week ($23,660 per year).  Under the proposed rules, that amount would go to $970 per week ($50,440 in 2016). 
Key Provisions of the Proposed Rule
The Notice of Proposed Rulemaking (NPRM) focuses primarily on updating the salary and compensation levels needed for white collar workers to be exempt. Specifically, the Department proposes to:

1. set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers ($970 per week, or $50,440 annually in 2016);
2. increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers ($122,148 annually); and
3. establish a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption.

The Department is also proposing to automatically update the standard salary and  HCE total annual compensation requirements to ensure that they remain meaningful tests for distinguishing between bona fide executive, administrative, and professional workers who are not entitled to overtime and overtime-protected white collar workers. 
 
In addition, the Department discusses the current duties test and solicits suggestions for additional occupation examples and requests comments on the current requirements. Similarly, the Department seeks comment on the possibility of including nondiscretionary bonuses to satisfy a portion of the standard salary requirement. The Department is not proposing specific regulatory changes on either of these issues at this time.

Background

Since 1940, the Department’s regulations have generally required each of three tests to be met for one of the FLSA’s white collar exemptions to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid must meet a minimum specified amount ($50,440 in 2016); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.
 
It should be remembered that this is presently only a proposal which is subject to review and comment. However, it is expected that the final rule will be very close to this proposal. The only viable options for employers is to increase the employee's salary to the new minimum salary required by the regulations or to convert a formerly exempt employee to an hourly , non exempt, employee who would then be eligible for overtime at the rate of time and one half for all hours worked over 40 in a work week.

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Paul Hilton is a certified Human Resources Consultant, located in Columbia, SC.
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