Regulation Recap: The DOL’s Proposed FLSA Regulations, and What’s Next

With the comment period now officially closed, I wanted to summarize the Department of Labor’s Wage & Hour Division’s (WHD) proposal to amend the Fair Labor Standards Act (FLSA) Regulations and, in particular, the regulations governing the “white collar” exemption for executive, administrative, and professional employees.  The Notice of Proposed Rulemaking (“NPRM”) is both straightforward and ominous at the same time, as I will explain below.

As the DOL begins its likely lengthy work to address the voluminous comments it received, here is a summary of the changes in the proposed regulations, a look at what did not change, and next steps for employers looking ahead to the first quarter of 2016.

In short, the WHD’s proposed FLSA regulations are clear on one point: employers with exempt white-collar employees will need to pay them higher minimum salaries, even in some cases for “highly compensated” employees who now only barely clear the current threshold.  Unless the WHD decides to add more to the regulations based on feedback it received on topics like the duties test, everything else in the regulations will stay the same.

The WHD asked for (and, based on my anecdotal analysis, received) extensive comments on the duties test and on whether non-discretionary bonuses will count toward salary level calculations.  When the final regulations take effect, the impact  will be far reaching.  Employers: if you hadn’t started planning already, you need to start now, and plan for the impact in 2016 while you are setting budgets and have time.  Waiting until 2016 could put you under the gun to make changes.

Change #1: Higher Minimum Salaries

To briefly recap, the FLSA generally requires that employers pay employees overtime—at least straight time plus one-half times their “regular rate” of pay for every hour they work in excess of 40 hours in a particular workweek. 29 U.S.C. § 207(a). The FLSA and its enabling regulations published by the DOL exempt certain groups of employees from these overtime requirements. One such group of exemptions, and by far the most common, relates to employees working in jobs that the FLSA describes as executive, administrative, or professional and the propsed regulations call the “EAP” exemptions (also widely referred to as the “white collar” exemptions). 29 U.S.C. § 213(a)(1). In order for employees to fall within the EAP exemptions, they must meet three requirements:

1. They must perform executive, administrative, or professional duties (the “duties” test);
2. They must be paid on a salary basis each pay period; and
3. They must earn at least a specified weekly salary (described in the NPRM as the “salary level” requirement).

Related to the EAP exemptions, the regulations also exempt “highly compensated” employees who “customarily and regularly” perform one of the exempt duties of an administrative, executive or professional employee, but who do not otherwise meet the duties test. 29 C.F.R. § 541.601.

The DOL’s proposed FLSA rules will increase the salary level to the 40^th percentile of weekly earnings for full-time salaried workers, based on Bureau of Labor Statistics (BLS) data.  In 2013, the NPRM explains that the salary level would have equaled $921 per week (the equivalent of just a shade less than $48,000 per year).  The DOL projects that the 2016 salary level will increase to approximately $970 per week, or the equivalent of $50,440 per year.  That number might end up just a little bit high, as I’ve noted on Twitter that with CPI numbers coming in lower than expected this year, many indexed minimum wages will not increase in 2016.

More importantly, for the first time in the FLSA’s history, the salary and compensation levels would be indexed to this BLS data and updated annually, without the need to go through further rulemaking.  Think of it as the “Ben Carson Salary Plan” without a starter salary.

Also, eagle-eyed readers will notice that I’m saying “the equivalent” of an annual salary.  That’s important because the FLSA’s salary level is based on weeks, not years.  An employee that makes $50,440 per year but whose salary does not always equal at least $970 per week would not meet the salary level test each week.

Change #2: Higher Minimum Salaries for HCEs

For highly compensated employees (HCEs), the threshold would be set to the annualized value of the 90^thpercentile of earnings for full-time salaried workers, or $122,148 annually.

The DOL’s justification

In support of these two changes to the salary level test, the NPRM reaffirms the DOL’s longstanding position “that the salary level is the ‘best single test’ of exempt status.”  As the NPRM explains in detail (285+ pages of preamble, 9 pages of rules), WHD has historically set the salary level based on “a broad set of data on actual wages paid to salaried employees and then set the salary level at an amount slightly lower than might be indicated by the data.”  The DOL’s frequently asked questions released with the NPRM explained that the DOL believes that the 40^th percentile level “represents the most appropriate line of demarcation between exempt and nonexempt employees.”  The DOL believes that a higher salary level will better distinguish between those workers who may be properly classified as exempt and those who likely are not, without the need for changes to the duties tests (well, maybe–back to that shortly).  By the Department’s calcuations, “[a]t the 40th percentile of full-time salaried workers, there will be 10.9 million fewer white collar employees for whom employers could be subject to potential litigation regarding whether they meet the duties test for exemption (4.6 million who would be newly entitled to overtime due to the increase in the salary threshold and 6.3 million who previously failed the duties test and would now also fail the salary level test).”

Although the DOL’s lengthy explanation suggests that it may be wedded to this model, it did ask for (and received) public comment on alternatives to this approach.

Possible Change #3: Incorporate Bonuses in the Salary Level

The DOL also mentioned in the NPRM that it is considering whether and how to also permit non-discretionary bonuses and incentive payments to count toward a portion of the salary level for the EAP exemptions.  I find this particular change somewhat unlikely, since it would run counter to the worker-friendly changes elsewhere in the NPRM and undermine the weekly nature of the salary level in the regulations.  As the NPRM suggests, the DOL is likely to cap the amount of the salary requirement that employers could satisfy through non-discretionary bonuses, commissions, and incentive pay even if it does adopt these changes.

That’s It!  Everything else stays the same (we think).

Nothing else in the NPRM has officially changed.  For example, the regulations will still exclude professionals like lawyers, teachers, and doctors as well as qualifying outside sales employees.  Special rules for the motion picture industry and a lower salary level for American Samoa remain unchanged, too.

More importantly for those of us that have been watching the DOL’s public comments over the past 18 months, the NPRM does not include changes to the duties tests for the EAP exemptions.  That being said, the DOL may make changes to the duties test when issuing the Final Rule based on the questions it asked about in the NPRM.

The WHD also sought comments on the following questions:

1. What, if any, changes should be made to the duties tests?
2. Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?
3. Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model? Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?
4. Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the Department reconsider our decision to eliminate the long/short duties tests structure?
5. Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?

WHD also asked whether it should add “examples of additional occupations to provide guidance in administering” the white collar exemptions.  The questions could simply be WHD engaging in fact gathering, but it could use the public comments on these questions to craft changes to the duties tests for the EAP exemptions.  While making changes to the duties test in that way would undoubtedly spawn litigation, employers should have contingency plans in place to deal with a California-style quantitative duties test regime.

What Employers Should Be Doing Now

In short: Start planning, if you haven’t already.

The higher salary level will impact a wide range of employers–somewhere between the WHD’s 10.9 million worker estimate and other studies that peg the impact at 15 million or more–but with the comment period closed, it makes sense to highlight three areas in particular:

1. Industry impact. The NPRM singles out educational and health services as heavily impacted, along with wholesale/retail trade, professional and business services, and the leisure and hospitality industries.
2. Regional impact.  Regional differences will mean that the salary level change is felt more acutely in some parts of the country than others.  $50,440 per year goes much further in Alabama than in California, and employers in lower cost regions may have to shift compensation more aggressively, or move more workers to non-exempt roles.  Even California employers are not off the hook as the proposed salary level exceeds even that state’s current threshold.
3. Positional impact.  The salary level increase will likely wipe out exempt positions offered on a part-time basis, which are still possible at the current $455/week level.  A part-time nurse or store manager that made $25,000 or $30,000 per year would not qualify as exempt under the new regulations.  The NPRM does not permit employers to pro-rate salaries based on full time equivalents.

If the DOL stays true to the last 9 pages of the NPRM, the salary level increase will be the only change, and it would likely accomplish the DOL’s goal of using restoring the primacy of this single test of exempt status.  On the bright side, litigation over whether an employee’s duties meet the requirements of one of the EAP exemptions should be far less frequent.

The DOL estimates that the Final Rule resulting from the NPRM will not be released until mid-2016, since the DOL plans to “rely on data from the first quarter of 2016” in setting the salary level.  That’s not much time.  Whenever the DOL finalizes the proposed rule next year, it will not likely provide a long grace period for compliance.  In 2004, the DOL gave employers only 120 days to comply with those new rules, and the DOL has given no hints that it plans to give employers more time to comply.  Planning now with wage and hour counsel, particularly while setting 2016 budgets, will help avoid abrupt impacts next year.  Many employers may need to budget for salary increases and/or increased overtime costs for at least part of 2016.