Department of Labor Proposes Compensation Increases for Overtime Exemption Tests, Including $50,440 Minimum Salary Basis

On June 30, 2015, the Department of Labor (DOL) unveiled its long-awaited proposed revisions to the tests for the “white collar” overtime exemptions to the Fair Labor Standards Act (FLSA). The DOL did not propose changes, at least for now, to the “duties” tests. It did, however, propose revisions to the compensation tests, significantly increasing the minimum salary required for an employee to be considered exempt. The DOL estimates that these increases would extend overtime pay and the minimum wage to nearly 5 million American workers within the first year of its implementation.

DOL Proposes More Than Doubling Minimum Salary Requirements

The FLSA provides exemptions from minimum wage and overtime pay for executive, administrative, professional, and computer employees, which are commonly referred to as the white collar exemptions. To qualify under these so-called “white collar” exemptions, employees must perform certain types of work as their primary job duties (the “duties test”) and generally be paid a minimum salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis” test).

The regulations were last amended in 2004 and, currently, generally require that employees be paid a minimum salary of at least $455 per week ($23,660 per year) to come within the exemptions, assuming they also meet the related duties tests. The DOL’s proposal increases this amount to $970 per week, or $50,440 per year, in 2016. The DOL is also proposing that this minimum salary amount automatically update annually so that it does not become outdated as time passes between rulemakings.

The proposed increased salary level equates to the 40^th percentile of earnings for full-time American salaried workers. The DOL stated that it has long recognized the salary level test as “the best single test” of exempt status, and it hopes that such a bright-line test would simplify the identification of overtime-protected and exempt employees, thus making the exemptions easier for employers and workers to understand. Of course, even when the new rules take effect, employees earning $50,400 or more must still satisfy the duties tests.

Another salary level that is slated to increase is for those considered “highly compensated employees”—defined as individuals who earn at least $100,000 in total annual compensation—who are exempt if they meet a less stringent application of the duties test. Under the proposed regulations, the threshold for application of that less stringent duties test will increase to $123,000 in 2016 annual compensation. That proposed compensation threshold is at the 90^th percentile and also is subject to automatic annual updates.

Notably, while the proposed regulations would increase the minimum salary for “computer employees,” they do not impact those who meet the duties test for that exemption and who are paid on an hourly basis of at least $27.63 per hour.

The DOL also noted it understands employer concern that certain employees who would become newly entitled to overtime under a higher salary requirement would lose the flexibility they currently enjoy to work remotely on electronic devices where employers are concerned about overtime liability. The proposed rules do not address this issue but the DOL stated it will publish a Request for Information in the near future seeking information from stakeholders on the use of electronic devices by overtime-protected employees outside of scheduled work hours.

Under Further Consideration: Whether Bonuses Can Count Toward Salary

The DOL has consistently assessed compliance with the salary basis test by looking only at actual salary or fee payments made to employees and (with the exception of the “highly compensated” test) has not included bonus payments of any kind in this calculation. The DOL is considering whether to permit nondiscretionary bonuses and incentive payments, in combination with a minimum weekly salary amount, to count toward satisfying the standard salary level test.

To that end, the DOL is seeking comments on several questions it posed:

• what industries commonly have pay arrangements that include nondiscretionary bonuses and incentive payments;
• what types of employees typically earn nondiscretionary bonuses and incentive payments;
• what types of nondiscretionary compensation do employees receive;
• the appropriateness of including commissions as part of nondiscretionary bonuses and incentive payments that could partially satisfy the standard salary level test; and
• to what extent including nondiscretionary bonuses and incentive payments as part of the salary level would advance or hinder that test’s ability to serve as a dividing line between exempt and nonexempt employees.

The DOL noted that in order for employers to be permitted to credit such compensation toward the weekly salary requirement, employees would likely need to receive such payments monthly or more frequently. The DOL said it would not consider permitting employers to make a yearly catch-up payment to satisfy the minimum salary-basis test.

Changes To The Duties Test Still Possible

The DOL made no specific proposals to modify the standard duties tests; rather, it merely stated it is seeking comments on whether the tests are working as intended, which in the DOL’s view means whether too many individuals are being classified as exempt. In particular, the DOL is concerned that in some instances (for example, working managers at retail or food establishments) the current tests may allow exemption of employees who are performing a disproportionate amount of nonexempt work and, as a result, are not white collar employees in any meaningful sense. Accordingly, the DOL advised that it is considering revisions to the duties tests, such as requiring that white collar employees spend a certain amount of time performing their primary duties (such as 50 percent as currently required under California state law) or otherwise limiting the amount of nonexempt work they can perform.

Timing On Possible Implementation of New Rules

The DOL invites written comments on its proposed rules, and they must be submitted within 60 days after the proposed rules are published, which we expect to occur soon. After the comment period, the DOL will issue a final rule, after which the changes will take effect. Actual implementation of the rule may be delayed if businesses or trade groups file suit to block implementation, which has already been threatened.

Ultimately, a significant increase to the salary basis test is likely, and therefore employers should review their exempt employee workforce to identify those employees who earn less than $50,440 and consider whether or how to reclassify them when the rules become final. Also, employers who regularly compensate exempt employees using bonuses should consider the questions the DOL has asked about their industry. All employers should consider how the questions solicited by the DOL regarding potential revisions to the duties tests may impact the exempt classification of their workforce.

For more information or assistance complying with the FLSA or related state wage and hour laws, please contact Christopher L. Nickels at (414) 277-5519/christopher.nickels@quarles.com, Sean M. Scullen at (414) 277-5421/sean.scullen@quarles.com, Michael Aldana at (414) 277-5151/michael.aldana@quarles.com, Gary R. Clark at (312) 715-5040/gary.clark@quarles.com, Otto W. Immel at (239) 659-5041/otto.immel@quarles.com, or your Quarles & Brady attorney.