US Department of Labor Proposes Major Changes in FLSA Exemption Requirements
On July 6, 2015, the U.S. Department of Labor issued proposed changes to the current rules regarding exemptions from overtime pay requirements. If adopted, these new rules could significantly increase labor costs for both public and private sector employers. The new rules may also cause employers to rethink how work is performed.
Under the Fair Labor Standards Act (FLSA), employers are generally required to pay overtime to all non-exempt employees who work more 40 hours in a seven (7) day pay period. The overtime standard is different for law enforcement (43 hours) and firefighters (53 hours). In order to be exempt from the overtime requirement, an employee must satisfy a two part test. First, the employee must be employed in an executive, administrative, or professional capacity as those terms are defined in the law. Second, the employees must be paid on a salaried basis and the salary must be at least $455 per week ($23,660 annualized). Persons employed as an executive, administrative or professional employee whose salary falls below the established minimum remain eligible for overtime pay.
If the proposed rules are adopted, the minimum salary for an exempt employee would increase from $455 per week to $921 per week ($47,892 annualized). As a result, executive, administrative and professional employees who are currently treated as exempt, but who earn less than $47,892, would be entitled to overtime pay. The Department of Labor estimates that in the first year after the proposed rule is adopted, 4.6 million workers will be affected. An “automatic updating” provision in the proposed rules, which would annually adjust the minimum salary level, would continue to add more executive, administrative and professional employees to the ranks of those eligible for overtime pay.
Not all public sector employees who are currently treated as salaried exempt employees would be affected by a change in the salary standard. “White collar” salaried workers not subject to the salary level test include teachers, academic administrative personnel, physicians, lawyers, and judges. Those employees would remain exempt from the overtime requirement even if their salary fell below the new proposed minimum.
It is unknown if or when the proposed rules will come into effect. Congress could take legislative action to block the new rules. However, as the presidential campaign season is well underway, Congress may be reluctant to block rules that could be characterized as benefitting the middle class. It is likely that some interested party will file a lawsuit and seek to enjoin the new rules from taking effect, in the hope that the next Administration will move in a different direction.
However, in anticipation that the proposed rules may come into effect, it would be prudent for employers to assess their potential additional overtime liability. While the number of employees who would fall below the new minimum salary standard will be readily apparent, it may be more difficult to determine the number of hours that those employees currently work if they are not keeping track of their hours. For currently exempt employees who generally work a 40 hour schedule, the impact of the proposed rules would likely be nominal. More attention will be needed for high hour/low salary workers. Should the proposed rules come into effect, employers would have the option of increasing salaries to the new minimum standard. If this is not feasible, then employers will either need to absorb the overtime costs or reduce the number of hours worked by those employees, perhaps by assigning some of their responsibilities to lower paid or part-time employees.
Mark Broth is a member of the Drummond Woodsum’s Labor and Employment Group and his practice focuses on the representation of private and public employers in all aspects of the employer-employee relationship. This is not a legal document nor is it intended to serve as legal advice or a legal opinion. Drummond Woodsum & MacMahon, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such. “Copyright 2015 Drummond Woodsum. These materials may not be reproduced without prior written permission.”