Major Changes to Overtime Regulations for "White Collar" Workers

Authored by John Pueschel

On July 6, 2015, the U.S. Department of Labor (“DOL”) issued proposed new regulations that will significantly change the law governing certain “white collar” workers who are exempt from minimum wage and overtime pay.  All employers need to become familiar with these proposed rules, which may, if they become final, greatly impact wages and overtime pay to workers.  In addition, for those that want to have their voices heard, there is still time (until September 4, 2015) for the public to make formal comments to the DOL.

Under the Fair Labor Standards Act (“FLSA”), which is the federal wage and hour law, some employees may be classified as “exempt” from the Act’s minimum wage and overtime pay requirements.   The most well-known and commonly used exemptions are the so-called “white collar” exemptions applicable to executive, administrative, and professional employees.  The DOL’s proposed rules will change the current regulations to more than double the current minimum salary level for exempt employees, significantly increase the salary level required for employees to be exempt from overtime as highly compensated employees, and automatically adjust that minimum salary level each year to account for the increase in the cost of living. 

As a practical matter, the proposed regulations will mean that fewer employees will meet the requirements to be exempt from overtime (and thus will be entitled to overtime pay), or that employers must pay higher salaries in order for the employees to remain exempt under the FLSA.  Here are the specific changes proposed to the white collar exemptions, which are expected to become effective by 2016:

 

• Increase (by more than double) the current minimum salary threshold (currently    $455 per week, or $23,660 per year) to $921 per week, or $47,892 per year, which will be adjusted annually by DOL.  Assuming the rules become final, the salary level is estimated to be set at $970 per week, or $50,440 per year for 2016.

• Increase the minimum compensation for Highly Compensated Employees (HCE) from its current level ($100,000 per year) to $122,148 per year.

• Create an automatic, annual adjustment mechanism for the minimum salary thresholds for the standard exemption and that for HCE.  (The DOL is asking for public comments to guide its determination to use one or the other of two adjustment mechanisms.)

The DOL states that under the proposed regulations, approximately 4.6 million workers would lose their exemption under the proposed rules (and thus be eligible for overtime pay), unless employers increase their pay.  In terms of economic impact, these changes are significant.  The DOL estimates that the “average annualized direct employer costs will total between $239.6 and $255.3 million per year.”  In addition, the DOL also states that this “proposed rulemaking will also transfer income from employers to employees in the form of higher earnings. Average annualized transfers are estimated to be between $1.18 and $1.27 billion, depending on which of the two updating methodologies is used.”

After a period of public comment, the DOL will publish the final rules, which will be codified as final and binding federal regulations.  It seems all but certain, barring some sort of exceptional set of circumstances, that the proposed rules increasing the salary levels and adding a mechanism for automatic annual increase will become final.

For those who wish to have their voices heard on these proposed regulations, the DOL is accepting public comments until September 4, 2015.  Details for submitting comments are can be found here.