On June 30, 2015, the U.S. Department of Labor (DOL) issued a proposed rule to modify the “white collar exemptions” provided by the Fair Labor Standards Act (FLSA). The white collar exemptions are minimum wage and overtime exception rules for executive, administrative, professional, outside sales and computer employees. Employers may see increased labor costs as a result of the changes, as previously exempt employees may now be eligible for overtime pay.
Why Is the DOL Issuing a Proposed Rule?
On March 13, 2014, President Barack Obama directed the DOL to simplify and modernize the regulations that protect “white collar” workers under the FLSA.
The Administration’s concern is that current white collar exemption requirements are outdated because the salary threshold has been changed only twice in the last 40 years. Additionally, fewer workers are eligible for overtime now than in the past due to inflation.
- The salary basis test is used to make sure the employee is paid a predetermined and fixed salary that is not subject to reduction due to variations in the quality or quantity of work.
- The salary level test is used to ensure that the employee meets a minimum specified amount to qualify for the exemption.
- The duties test requires that the employee’s job duties conform to executive, administrative or professional duties, as defined by law.
Higher Salary Requirements
The proposed rule would increase the current minimum salary level of $455 per week ($23,660 per year) to $921 per week or ($47,892 per year). The proposed new salary level represents the 40th percentile of wages earned by workers across the United States in 2013. Projected data for 2016 would set these numbers to $970 per week and $50,440 per year.
The proposed rule would also increase the $100,000 salary level for highly compensated individuals to $122,148 per year—the 90th percentile of wages earned by workers in 2013.
Calculating Employee Wages
The proposed rule also states that the DOL is considering allowing an employer to apply nondiscretionary bonuses and incentive payments towards a portion of an employee’s standard salary level.
The proposed rule explains that including these bonuses would more accurately represent an employee’s earnings and would provide a better assessment of whether a white collar exemption should apply.
Impact on Employers
If implemented, the proposed rule would require employers to re-determine the exemption status of employees, update and adapt overtime policies, notify employees of policy changes and adjust their payroll systems.
The DOL believes that higher salary level requirements for white collar exemptions will simplify the process of employee classification because employers would not be required to perform a duties test for employees below the updated salary requirements and lead to fewer lawsuits and lower litigation costs for employers.
On the other hand, these measures could trigger significant costs. For example, employers may be required to pay overtime wages to previously exempt employees or incur ongoing managerial costs because they would need to monitor more closely the work of employees they didn’t have to monitor before.