Department of Labor Proposes Doubling Overtime Threshold for Many Exempt Employees

June 30, 2015

The Fair Labor Standards Act (FLSA) requires most employees to receive the federal minimum wage of $7.25 per hour, and overtime pay for all hours worked over 40 in a workweek. The FLSA exempts several categories of employees from the overtime requirement, including bona fide executive, administrative and professional employees. To qualify for one of these exemptions, an employee must perform certain job duties and be paid a salary no less than the level presently set at $455 per week.

On June 30, 2015, the U.S. Department of Labor (DOL) released a Notice of Proposed Rulemaking to more than double the weekly salary threshold for meeting the exemption test. Extrapolating from 2013 data, the regulations would increase the weekly salary threshold from $455 to an estimated $970. Moreover, the proposed regulations would affect the “highly compensated employee” exemption, increasing the annual salary threshold for such employees from $100,000 to $122,148. Finally, the proposed regulations suggest two different mechanisms to update these numbers automatically each year to remain current. The current salary threshold of $455 per week has been in effect since 2004.

According to the DOL, the changes were proposed to restore the effectiveness of the salary-level test, which had eroded due to inflation, and to keep the regulations from “becoming outdated and ineffective between rulemakings.” The new regulations would set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers, updated annually. Assuming the proposed regulations are approved, the DOL estimates that the 40th percentile level in 2016 will be $970 per week, or $50,400 per year. For highly compensated employees, the compensation level would be set at the 90th percentile of earnings.

Additional Proposed Regulations for Special Salary Tests and Nondiscretionary Bonuses

In addition to the proposed increase in the salary test for the executive, administrative and professional exemptions, the proposed regulations also address special salary tests under the FLSA. For example, the proposed regulations would modify the salary test for workers in American Samoa and in the motion-picture-producing industry.

Moreover, the DOL historically has not permitted the issuance of bonus payments in the calculation of salaries for executive, administrative or professional employees. The DOL is now considering whether to permit nondiscretionary bonuses and incentive payments to count toward a portion of the standard salary-level test for these employees, and is seeking comments on whether it should modify the regulations in this manner.

Notice and Comment Period

The proposed regulations do not go into effect immediately. First, members of the public have 60 days from the date the proposed regulations are published in the Federal Register to submit comments to the DOL through the Federal eRulemaking Portal or by mail. After another 30 days for reply comments, the DOL may issue the final regulations. It is unlikely any final regulations would go into effect until at least 2016.

Key Employer Takeaways

Employers should keep in mind the following points about the proposed regulations:

  • The proposed regulations are not in effect, and the issuance of the proposed regulations does not require employers to make any immediate changes.
  • Employers should anticipate the new regulations going into effect in 2016 and should begin preparing for the changes by conducting an exemption audit, with which McGuireWoods can help. Employers should begin determining which currently exempt employees make less than $50,400. Employers should pay particular attention to those employees and determine what changes are necessary to remain compliant with the law when it becomes effective.
  • Employers who wish to contribute their viewpoint to the DOL should consider providing public comment on the proposed regulations.

Additional Resources

  • The text of the DOL’s June 30, 2015 notice of proposed rulemaking
  • The DOL’s “fact sheet” about the final rule
  • The DOL’s “frequently asked questions” about the new regulation
  • McGuireWoods’ Mar. 14, 2014, client alert announcing President Obama’s presidential memorandum directing the DOL to propose these regulations

For questions about the proposed regulations, please contact the author or any other member of the firm’s labor and employment group.