DOL Releases Proposed Rule on White-Collar Exemptions

The U.S. Department of Labor (DOL) released a long-anticipated Proposed Rule this morning expected to make eligible for overtime compensation nearly five million workers—who will no longer fit the “white-collar exemption” by virtue of their salary—in its first year of implementation.

The Proposed Rule comes in response to a Presidential Memorandum signed in March 2014 directing the DOL to revisit the Fair Labor Standards Act’s (FLSA) minimum wage and overtime guidelines. For more than 70 years, employers have had to satisfy three tests in order avail themselves of the white-collar exemption from minimum wage and overtime: (1) employees must receive a predetermined, fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary-basis test”); (2) employees must receive an established, minimum salary; and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties, as defined by regulations (the “duties test”).

Currently, employers satisfy the salary-basis test with a weekly salary of $455, or $23,660 per year. A separate exemption for highly compensated employees—for whom the duties test is less stringent—sets the minimum at $100,000 in total annual compensation.

The DOL contends that the effectiveness of the salary-basis test—unchanged since 2004—has diminished over time. Using data from the U.S. Bureau of Labor Statistics, the DOL proposes to set the minimum salary at the 40th percentile of earnings for full-time salaried workers, amounting to a projected $970 per week, or $50,440 per year, in 2016. Annual compensation for the highly compensated employee exemption would escalate to the 90th percentile, or $122,148 per year. To ensure the levels remain relevant, the DOL has proposed a mechanism to update them annually using either a fixed percentile of wages or the Consumer Price Index for All Urban Consumers.

The DOL wrote extensively on methodology and perceived errors in past income analysis when setting the salary-basis test, particularly with respect to the 2004 increase, in what may be an attempt to preempt comments critical of the proposed salary basis.

The DOL has not proposed changes to the duties tests for the white collar exemptions, but “is seeking comments on whether the current duties tests are working as intended to screen out employees who are not bona fide ‘white collar’ exempt employees.” The request for comments focuses on the Executive and Computer Professional Exemption with a series of specific questions posed to all stakeholders.

The Proposed Rule has not yet been published in the Federal Register. Once published, dates for submitting comments will be available with the customary timeframe for comments 60 days from the date of publication. Information on submitting comments, as well Fact Sheets, Frequently Asked Questions, and other resources, can be accessed via the Proposed Rule website. MSEC will host a webinar on the proposed changes and ramifications for employers in the near future.