No, they are not kidding. On Tuesday, June 30, 2015, the long awaited proposed rules on the so‑called “white collar” exemptions under the Fair Labor Standards Act were released by the Department of Labor. You remember the proposed regulations, right? About a year ago, the President directed the DOL to look into the exemptions and determine if changes were in order. Seems they were.
So finally, after a year, we have those changes. 295 pages of them. That seems like a lot of proposed changes, but wait . . . . most of that 295 pages is a history lesson on the previous changes. There are really only two big proposed changes in the regulations and both of them have to do with the salary level test. Before we get into those, let’s recap a bit – if it’s good enough for the DOL, it is good enough for us too.
In order to be exempt from overtime under the white collar exemptions, an employee must meet three tests. The salary basis test, the salary level test, and a duties test. The salary basis test means that an employee is paid a fixed salary in each workweek that does not vary depending on the quality or quantity of the employee’s work. That one is unchanged in the proposed regulations. The duties test is what the exempt employee’s job is. Or what the employee does. There are executive, administrative, professional, outside sales, and computer professional duties tests. Again, no change in the proposed regulations . . . BUT . . . the DOL is asking for comments on whether there should be changes. So stay tuned.
And finally, there is the salary level test and here is where the big change comes in. The current salary level test for the white collar exemptions is $455 per week or $100,000 per year for highly compensated employees. $455 per week is $23,660 per year and that amount is actually below the poverty level for a family of four. The proposed regulations will change how the salary level is set from this flat amount to an amount that is equal to the 40th percentile of weekly earnings for full-time salaried workers. The proposed regulations estimate that in 2016 that will be $970 per week or $50,440 annually. In addition, the highly compensated employee annual salary will be set at the 90th percentile of earnings for full-time salaried workers or an estimated $122,148 annually in 2016. That is a big change. In fact, according to the DOL, about 11 million employees will be impacted.
But there is another big change. For the first time ever, the DOL is proposing that the salary level automatically update on an annual basis without having to go through additional notice and comment rule making. They haven’t decided how yet, but are proposing either a percentile of earnings for full-time workers’ basis or changes based on inflation.
Now that you know all this, what do you do? Well first, don’t forget that these are proposed regulations. There is a 60 day public comment period, so the first thing you might want to do is comment. That having been said, the salary level is not likely to change and that or a number very close to it will likely be the final rule.
The next thing you ought to do is figure out how many of your employees fall within the gap. How many exempt employees do you have that make more than $23,660 and less than $50,440? Once you have that done you have some time to decide how to react. And you can react in several ways. You can leave everything alone, continue to pay a salary to these folks and pay them overtime when they work overtime, or make sure that they don’t work overtime. For those that are close, give them a raise to get them above the $50,440. Or you can convert these folks to hourly pay rates. But whatever you decide, remember this – for all those employees who used to be exempt and soon will not be, once the proposed regulations become final and take effect, you MUST begin keeping records of hours worked.