August 28, 2015

The Department of Labor (DOL) has published new proposed regulations on the classification of exempt workers under the Fair Labor Standards Act (FLSA), which could dramatically affect overtime requirements starting in 2016.
With the Wage and Hour Division of the DOL publishing the Notice of Proposed Rulemaking (NPRM) for revisions to the FLSA's overtime provisions on July 6, 2015, employers will need to reexamine how they classify and compensate their employees. This alert provides a summary of the current FLSA regulations, and the changes the NPRM proposes.

The FLSA guarantees a minimum wage and an overtime pay rate of at least one and one-half times an employee's regular hourly rate for hours worked above 40 hours per workweek, unless that employee is "exempt" under an FLSA exemption. Under the current regulations, exempt employees include those in "a bona fide executive, administrative, or professional" position. In order to be considered in an executive, administrative, or professional position, an employee must fulfill three requirements: (1) the employee must be paid on a salaried basis, or receive a predetermined amount of pay each pay period regardless of quantity or quality of work performed; (2) the employee must make over $455 per week, or $23,660 per year; and (3) the employee must perform specified primary duties commonly associated with executive, administrative, or professional functions. In addition, the FLSA exemptions include "highly compensated employees" (HCEs), which are employees who perform office or non-manual work, customarily perform at least one of the duties of an executive, administrative, or professional employee, and make at least $100,000 per year. 

The NPRM proposes three major changes to these requirements:

  • Exempt Salary Threshold: The first and most substantial proposed change in the NPRM is to the exempt salary threshold requirement. The proposed regulations increase in the salary threshold from $455 per week ($23,660 per year) to the equivalent of the 40th percentile of earnings for full-time salaried workers. This means that in when the regulations likely go into effect in 2016, the salary threshold is expected to be roughly $50,440 per year.
  • HCE Threshold: The next proposed modification in the NPRM is an increase in the HCE threshold from $100,000 per year to $122,148 per year. If the salary threshold for HCE qualification is raised, fewer employees will qualify as HCEs. Consequently, overtime may need to be paid to these individuals.
  • Annual Threshold Adjustment: The final major change in the NPRM is a self-adjusting update to the exempt salary threshold and HCE threshold on a yearly basis. The NPRM proposes two measures to update the salary level; it will either be updated based on a fixed percentile of wages, or the consumer price index. This is to ensure that the threshold does not become outdated as the cost of living rises, and to provide predictability to employers. Rather than drastic increases in the threshold when the rules are sporadically updated (which historically, has been once every ten years), employers will be able to expect incremental, annual increases of a nominal amount.

The DOL is also debating adding two further provisions which would:
(1) allow employers to include bonuses when calculating an employee's yearly pay for determining exemption from overtime; and
(2) amend the functions an employee must perform in order to be considered a bona fide executive, administrative, or professional position.

Currently, the NPRM is not in its final format and is open for public comment. The DOL is seeking further comment on all of the proposed regulatory changes listed above, and comments must be submitted by September 4, 2015. After all comments are received, the rules will be revised to reflect both employer and employee commentary.

Although the final regulations are not expected to go into effect until sometime in 2016, employers can start preparing now for the upcoming change. If enacted as currently written, it is anticipated that approximately 4.6 million more Americans (including 50,000 more Iowans) will be entitled to overtime pay. The DOL suggests employers cope with the new rules in one or more of the following ways: (1) pay the required overtime premium for overtime hours; (2) reduce employees' regular rate of pay so the total weekly earnings of the employee and hours do not change after overtime is paid; (3) eliminate overtime hours; or (4) increase employees' salaries to the proposed exempt salary threshold. Further, employers should begin preparing a rollout plan for the new regulations. This plan should include proper documentation for employee reclassification, training and information sessions for employees regarding overtime eligibility, timekeeping requirements, and whether other benefits-such as paid time off-will be affected. 

If you have any questions regarding the changes in the NPRM, or have questions about the Fair Labor Standards Act generally, please feel free to contact Ahlers & Cooney, P.C. for more information.

Ahlers & Cooney Labor and Employment Practice Group
(1) The FLSA designates other exempt employees, including but not limited to "outside sales employees," certain computer professionals, commissioned sales employees, farm and fishing workers, small newspaper employees, babysitting or companionship occupations, criminal investigators, mechanics, and others that satisfy specified criteria. See 29 U.S.C. § 213(1).

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Reif, Rebecca


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