July 2, 2015

U.S. Department of Labor Proposes Sweeping Changes to FLSA Overtime Exemption Criteria

3 min

On June 30, 2015, the U.S. Department of Labor made public its much-anticipated proposed changes to the executive, administrative, professional, computer, and outside sales employee exemptions under the Fair Labor Standards Act ("FLSA"), commonly referred to as the "white collar" exemptions. These proposals stem from President Obama's March 2014 memorandum to the Secretary of Labor, characterizing the current white collar exemptions as "outdated" and out of step with "our modern economy." If adopted, the proposals, described below, will have a profound impact on employers' ability to treat certain employees as exempt from receiving overtime compensation.

The Current Framework

Generally, the FLSA requires employers to pay non-exempt employees an hourly rate of at least one-and-a-half times their regular hourly rate for time worked in excess of 40 hours in a workweek. Certain "white collar" workers, namely those employed in a "bona fide executive, administrative, or professional capacity," may, under certain circumstances, be considered to be exempt from this overtime requirement. This exemption can also extend to individuals employed in "outside sales" positions, and in certain computer-related occupations. (The FLSA also features a range of other exemptions, which are not discussed in this Alert.)

At present, in order to properly treat an employee as exempt under one of the FLSA's white collar exemptions, (i) the employee must be compensated on a salary basis at a rate of at least $455 per week, and (ii) the employee's primary job duties must fall within the substantive parameters of one of the above-noted exemption categories. This latter criterion requires a fact-intensive assessment regarding the nature of the employee's work and specific job responsibilities. An employee's job title is not determinative as to whether the employee falls within a given white collar exemption.

It is important to note that the FLSA's current $455 salary threshold merely sets a floor that states are free to – and, in some cases, do – exceed. For example, the minimum weekly salary threshold in order to consider treating an employee as exempt is $720 in California (rising to $800 in 2016), $475 in Connecticut, and $656.25 in New York (rising to $675 in 2016).

The Proposed Regulations

The Department of Labor's proposed revisions dramatically increase the FLSA's minimum salary threshold. Specifically, under the proposal, the current $455 per week threshold – which translates to an annual salary of $23,660 – will more than double, rising to $970 per week, for a minimum annual salary of at least $50,440 for an exempt white collar employee. This materially exceeds the current state-level minimum salary thresholds for every state.

Importantly, under the proposed regulations, the $970 salary threshold would automatically update based on inflation and wage growth over time, though the Department of Labor ("DOL") will solicit comments regarding the precise methodology to be used. The DOL estimates that, in the first year of implementation, over 4.5 million white collar workers who are currently exempt could become newly entitled to FLSA overtime rights, absent any intervening action by their employers.

At present, the DOL has not proposed any specific regulatory changes to the existing "primary duty" test, but will continue to assess this possibility.

What Does This Mean for Employers?

The proposed regulations will obviously have a significant impact on employers of all sizes. While the final regulations likely will not formally become effective until 2016, employers should not wait to begin taking proactive steps. For example, while employers may consider raising salaries for positions that fall below the new $970 per week threshold, employers may also consider implementing scheduling changes which would limit their overtime costs. Employers are also well-advised to assess their time and recordkeeping procedures, given the likelihood that certain currently-exempt employees may no longer be exempt upon implementation of the final regulations.