The U.S. Department of Labor’s Wage & Hour Division is expected to amend the Fair Labor Standards Act (FLSA) regulations by mid-2016 and, in particular, the “salary basis test” for what is commonly referred to as the “white-collar exemption.” This will create a significant change in the determination of whether an employee is entitled to overtime pay or is properly classified as “exempt” from overtime obligations.
Let’s briefly review the FLSA overtime framework.
Generally, all employees who work more than 40 hours in a given workweek are entitled to overtime pay. However, the FLSA exempts certain groups of employees from the overtime pay requirements. To qualify for the white-collar exemption, an employee must perform executive, administrative or professional duties (the “duties” test) and make a certain weekly salary (the “salary” test.)
Change From $455 per Week to $970 per Week for Salary Test
Currently, under the FLSA salary test, the required compensation is at least $455 per week, or $23,660 annually.
The new FLSA rule will raise the minimum salary level to qualify for an exemption to the 40th percentile of weekly average earnings of full-time salaried employees nationwide. For 2016, when the rule will likely go into effect, this will likely equate to $970 per week, or $50,440 per year. Expressing the minimum salary as being at the 40th percentile — the level at which 40 percent of salaried workers earn less than the amount and 60 percent earn more — means that the minimum salary level will change each year.
The Department of Labor estimates that 10.9 million workers will no longer qualify as exempt based on the new salary level.
Other Changes on the Horizon?
There may also be upcoming changes in the “duties test” for the FLSA exemption. The Department of Labor (“DOL”) may adopt a strict “division of labor” test. This means that to qualify for the exemption, an individual would have to spend at least 50 percent of his or her working hours performing “executive, administrative or professional duties.”
For example, if an assistant restaurant manager (who makes $40,000 per year) worked 60 hours per week and spent the majority of that time preparing food, working the cash register and carrying food to customer tables, that employee would not meet the new “salary” test and would not likely meet the “duties” test, since more than 50 percent of the working hours would not involve managerial duties.
Exemption for “Highly Compensated” Employees
FLSA regulations also exempt “highly compensated” employees who “customarily and regularly” perform one of the exempt duties of an administrative, executive or professional employee. For highly compensated employees, the new threshold would be set to the annualized value of the 90th percentile of earnings for full-time salaried workers, or $122,148 annually. More importantly, for the first time in the FLSA’s history, the salary and compensation levels would be indexed to the U.S. Bureau of Labor Statistics data and updated annually, without the need to go through the often time-consuming DOL rulemaking procedures.
DOL Reasoning for Change in Salary Level
In support of the proposed increase to the salary level test, the DOL has taken the position “that the salary level is the ‘best single test’ of exempt status.” By raising the threshold significantly, the DOL believes that workers who may be properly classified as exempt would be adequately distinguished from those who likely are not in the workplace.
The new salary levels still do not apply to outside sales employees, and they still exclude other professionals such as lawyers, teachers and doctors.