On July 6, 2015, the U.S. Department of Labor (DOL) published its proposed changes to the overtime regulations under the Fair Labor Standards Act (FLSA). The changes are significant and fall into two categories: salary basis and primary duties test. This post will focus on the minimum salary part of the proposal. We’ll address the primary duties test in a separate post.
To help organizations sort this out, I’ve asked Jonathan Segal, a partner with the firm Duane Morris LLP to share his knowledge of the subject. Please remember that Jonathan’s comments should not be construed as legal advice or as pertaining to any specific factual situations. If you have detailed questions, they should be addressed directly with your friendly local labor attorney.
Jonathan, let’s start with a little refresher. Currently, what are the requirements for an employee to be exempt under one of the FLSA’s white collar exemptions (such as, administrative, professional and executive)?
[Jonathan] An employee must meet three (3) requirements:
1. The employee must be paid a minimum weekly salary;
2. The employee must be paid on a salary rather than on an hourly basis. This means that only certain deductions are permitted from the employee’s pay for time not worked and no deductions are permitted based on the quality or quantity of work; and
3. The employee’s primary duty must be exempt in nature.
The DOL proposed changes are to #1. They have asked questions about #3 (which we will address in another post) and left #2 alone (at least for now).
What are the changes being proposed to the minimum salary?
[Jonathan] Currently, the minimum salary is $455 per week for most white collar positions. No minimum salary is required under federal law for some positions, such as medical doctors. Note: a minimum salary may be required under state or local law, even where not required under federal law.
Under the proposed regulations, the minimum salary will be equal to the 40th percentile of weekly earnings for full-time salaried employees as determined by the DOL’s Bureau of Labor Statistics. That amount is projected to be $970 per week in the first quarter of 2016, more than double the current minimum salary.
Plus, the minimum salary will be indexed ‘to guard against the erosion’ of the salary threshold. The DOL has suggested two options for indexing, inviting comment on the different approaches. Option one would be to increase the minimum salary so that it remains at the 40th percentile. The second option would be inflationary increases.
What do you think the rationale is for proposing automatic adjustments to the minimum salary?
[Jonathan] The reason for the proposed automatic adjustment is, as the DOL has said, to ‘guard against the erosion’ of the minimum salary requirement. Although the proposed increase itself is quite substantial, to be fair, the reality is that the minimum salary from 2004 is extremely low relative to today’s labor market.
On the other hand, the proposed automatic adjustments may be too much for some employers too afford. The DOL sometimes does not appreciate fully how businesses work. If the number is too high, an employer simply may convert the employee from exempt to non-exempt and not permit overtime.
The DOL has suggested that the employee still ‘wins’ even if this occurs, because they may have more time off. The DOL entirely misses the employee relations aspect of this change.
Most employees are dedicated, hardworking and take pride in their jobs. Some are upset when they feel their value is reduced because they are reclassified as non-exempt. When some employees were reclassified in 2004, the last time the regulations were modified, we saw this phenomenon take place in many workplaces.
Rather than automatic increases, I would hope the DOL would consider periodically proposing increases. That’s why submitting comments to the proposed regulations is so important. None of us knows what the future will bring. What if there had been an automatic minimum salary increase in 2009 at the height of the Great Recession?
Why should employers care about the proposed changes to highly compensated employees (HCE)?
[Jonathan] It is important to remember the highly compensated employee is not a separate exemption. Instead, if an employee is a highly compensated employee, under the current regulations, it is easier for him or her to meet the primary duty test.
Currently, the minimum salary for a highly compensated employee is $100,000 / year. The proposed change would increase the minimum salary to the 90th percentile of weekly earnings of full-time salaried workers. Under current statistics, that would be $122,148 annually.
This is a considerably smaller increase than the increase in the minimum salary: approximately 22 percent compared to more than 100 percent. Of course, the DOL has proposed that this amount be subject to automatic adjustments, too.
How important will this increase be? Well, I hate to sound like a lawyer, but ‘it depends.’ It depends on what happens to the primary duty test, because the higher level of compensation is relevant only to meeting the primary duty test. More on this issue in the next post in this series on the DOL’s proposed changes.
What is the impact of the proposed changes on state or local laws?
[Jonathan] It is important to keep in mind that employees always get whichever is better for them under federal, state or local law. So no matter what the DOL does or does not do, employers still must check to see if there are any areas where state or local law imposes additional requirements or restrictions.
What should employers be doing now in light on this action?
[Jonathan] It is really hard for the employer community to plan until we know what the DOL will do with the primary duty test. If the DOL implements or proposes changes to the primary duty test so that it is quantitative rather than qualitative, then employers are going to need to re-evaluate an even larger universe of positions.
More specifically, the DOL has asked whether it should adopt the California approach—the employee must spend more than 50 percent of his or her time performing exempt duties. If the DOL were to adopt this approach, I am not sure it will mean more money for employees. There actually could be less money available after employers pay lawyers to defend the inevitable flood of legal challenges that a percentage requirement all but invites
For now, employers should focus only on cost issues associated with the proposed minimum salary increase. Employers will need to assess whether they can pay the minimum salary to employees below the minimum knowing that the minimum will keep increasing.
In this regard, it is important to note the final number could be the proposed number or it could be lower or even higher. Let’s not forget that back in 2004 the final number for highly compensated employees was higher than initially proposed by the DOL.
But, even if an employer can make the necessary minimum salary increase, whether it should may depend on what happens with the primary duty requirement. That’s why this is so frustrating—we don’t know whether and what changes the DOL will propose, if any, with regard to the primary duty requirement, the subject of our next blog post.
Many thanks to Jonathan for sharing his knowledge. If you’re interested in keeping up with this topic, be sure to follow him on Twitter @Jonathan_HR_Law or read his blog at Duane Morris. As he mentioned, we have another post in the works on the primary duties test. Stay tuned for more on this important change.