On July 1, 2015, the Department of Labor issued proposed regulations concerning the so-called “white collar” exemptions under the Fair Labor Standards Act (FLSA). The proposed regulations have received a great deal of publicity and, if adopted as proposed, would substantially increase the minimum salary needed to qualify as exempt from overtime under the FLSA, potentially affecting over ten million employees nationwide and requiring employers either to increase the salaries of those employees or re-classify them as non-exempt.
An employee must satisfy three tests in order to qualify for one of the “white collar” exemptions– the “duties,” “salary basis” and “salary level” tests. The proposed regulations pertain primarily to the “salary level” test.
Under current federal law, exempt employees must receive a salary of at least $455 per week, or $23,660 per year, in order to qualify for one of the “white collar” exemptions. Under California law, exempt employees must receive a salary of at least twice the minimum wage for full-time employment, which amounts to $37,440 for 2015, to qualify for the “white collar” exemptions.
If adopted, the proposed regulations would result in the following significant changes:
- Increase in minimum salary needed for “white collar” exemptions – Most notably, the proposed regulations would require that employees receive a salary equal to or greater than the 40th percentile of weekly earnings for full-time salaried workers in order to qualify as exempt under the “white collar” exemptions. Economists currently project that this formula would result in a minimum salary of $970 per week, or $50,440 per year, for 2016.
- Automatic annual adjustments – The proposed regulations also call for automatic annual adjustments to the minimum salary level, based either on the rate of inflation or percentiles of earnings.
- Increase in minimum compensation for “highly compensated employee” exemption – The proposed regulations also address the minimum compensation required to qualify for the little-known “highly compensated employee” exemption. Under current rules, employees must earn at least $100,000 per year to qualify as exempt under the highly-compensated employee rules. The proposed regulations would set the minimum salary equivalent to the 90th percentile of earnings for full-time salaried workers (currently $122,148).
The proposed regulations must go through the complex federal rule-making process before they can become effective, and most observers believe that they are unlikely to become effective this year. The Department of Labor has also requested comment on potential changes to the “duties” test, and could issue additional proposed regulations regarding the “duties” test in the future.
What Should Employers Do Now?
- Remain alert for updates on the adoption of the proposed regulations – Adoption of the proposed regulations could mean increased payroll costs for many employers. Employers should remain alert to the proposed regulations and prepare themselves to comply with them if they are adopted, either in their current form or in a revised form. We will report on significant developments concerning the proposed regulations as they occur.
- Don’t forget that state law also applies – Employers should remember that many companies are subject to two separate sets of wage and hour laws. In California, for example, most employers are subject to both the federal Fair Labor Standards Act and the Industrial Welfare Commission’s Wage Orders. The FLSA and relevant state laws address many of the same subjects and are similar in many ways, but they are not identical. Employers cannot classify an employee as exempt unless the employee qualifies as exempt under both state and federal law.