New Proposed Overtime Regulations: Part I

This week the Department of Labor (DOL) has promised to issue their proposed changes to the Fair Labor Standards Act (FLSA); particularly those provisions in the FLSA that govern employees' entitlement to and exemption from overtime pay.  Although the proposed regulations have not been issued yet (as of Wednesday) the DOL has issued an advance copy through their website that you can enjoy reading in your spare time.  Allocate a significant amount, however, as the proposed regulations are 295 pages in length.

What should your business know about the proposed regulations?

  1. Salary Basis Test

The proposed regulations mostly address the salary basis test and the duties test for the white-collar overtime exemptions - i.e. the exemption from overtime pay for executive, administrative or professional or "EAPs." The biggest proposed change would be to significantly increase the minimum salary that would need to be paid to an EAP to satisfy the salary basis test. Currently and historically the minimum salary to satisfy this test has been a fixed sum (currently $455/week or $23,600/year for EAPs and $100,000 for Highly Compensated Employees or "HCEs"). The proposed regulations do a few things to change the way the salary basis test has always been handled.

First, the DOL proposes setting the salary basis test at an amount equal to the 40th percentile of earnings for full-time salaried workers for EAPs, and the 90th percentile for HCEs. That is to say, the DOL proposes a salary basis that would almost certainly increase annually.  The proposed regulations put these percentiles at $921 (40th) and $122,148 (90th) based on 2013 wage figures, but based on projected 4th Quarter 2015 data they estimate the salary basis to $50,440 that is not entirely accurate. $50,440 is a projected number only and the final figure could vary, though it likely would not vary more than 1-2% off this number.

Second, the DOL is determined to create a system whereby the salary basis automatically increases, but it has not determined how the agency is going to calculate the annual increase in these percentiles. They have, however, proposed two methodologies - one, using the Bureau of Labor Statistics (BLS) data on non-hourly paid employees to determine the 40th and 90th percentiles, or using the Consumer Pricing Index - Urban (CPI-U), which is a commonly used economic indicator for measuring the average change in the prices paid by urban consumers for goods and services. The DOL is not set on which method of calculation to use, so we will have to wait and see what the final regulations bring. They have determined their intent, however, to provide 60 days' notice of what the new salary would be for the forthcoming year to satisfy the salary basis test.

Third, the DOL is considering changing its longstanding prohibition against counting non-discretionary bonuses and incentive payments toward employees' salaries (to meet the salary basis test). Historically the DOL has not allowed employers to count such compensation toward the salary requirements for an exempt EAP, but they now appear inclined to consider it, though the details are absent from the proposed regulations. On this the DOL "envisions" that such bonus or other non-salary compensation would need to be paid monthly or more frequently, so dreams of doing annual payments to employees to catch them up to the salary basis threshold do not appear in the mix.

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