Update: Status of President Obama’s Recent Actions Concerning the Fair Labor Standards Act
As many of you have undoubtedly heard, President Obama recently instructed the Department of Labor (“DOL”) to revise its regulations interpreting the Fair Labor Standards Act (“FLSA”) exemptions to ostensibly better reflect modern salaries. Recently, we have received several questions regarding the hike in the salary requirements for overtime pay, and we thought it would be beneficial to provide an update to our clients, along with a brief explanation of the process.
The FLSA is a federal law that can only be amended by Congress, but the regulations implementing the law are created by the DOL. The DOL maintains the authority to issue regulations implementing the provisions of the FLSA, so long as they go through the proper rule making procedure which mandates public comment periods.
On Monday, July 6, 2015, in response to President Obama’s instruction, the DOL published a Notice of Proposed Rulemaking (“NPRM”) that will more than double the minimum salary necessary for a worker to be classified as “exempt” from overtime regulations.
The current threshold is $455.00 ($23,660.00 a year) and everyone making under that amount of money is automatically entitled to overtime pay (apart from some industry specific carve-outs which are beyond the scope of this update); everyone over that amount may be exempt if they otherwise qualify for an FLSA exemption. The most common FLSA exemptions and the factors which must be met in order to meet each exemption are:
The Executive Exemption
- The employee must be compensated on a salary basis at a rate not less than $455 per week;
- The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
The Administrative Exemption
- The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
- The employee’s primary duty (main, major or most important duty) must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers (assisting with the running or servicing of the business — as distinguished from working on a manufacturing production line or selling a product in a retail or service establishment — and includes work areas such as tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, procurement, advertising, marketing, research, safety, personnel management, human resources, employee benefits, labor relations, public relations, government relations, computer network, database administration, legal/regulatory compliance, and similar activities); and
- The employee’s primary duty includes the exercise of discretion and independent judgment (authority to make an independent choice, free from immediate direction or supervision) with respect to matters of significance.
The Professional Exemptions
To qualify for the learned professional employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
- The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
- The advanced knowledge must be in a field of science or learning; and
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
To qualify for the creative professional employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week; and
- The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
The exemptions do not apply to manual laborers or other workers who perform work involving repetitive operations with their hands, physical skill and energy. Non-management employees in production, maintenance, construction and other skilled trades (carpenters, electricians, etc.) are entitled to minimum wage and overtime premium pay, regardless of how highly paid they might be.
The Computer Employee Exemptions
- The employee must be compensated either on a salary or fee basis at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour; and
- The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
- The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
- The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
- A combination of the aforementioned duties, the performance of which requires the same level of skills.
Highly Compensated Employee Exemptions
- The employee must perform office or non-manual work;
- The employee must be paid a total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis); and
- The employee must customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.
The new projected minimum salary requirement is proposed to be somewhere around $970.00 a week ($50,440.00 a year). As you will note, the aforementioned exemptions all include the current $455.00 a week minimum salary threshold as a requirement. All of those requirements will be amended to the $970.00 a week threshold, if the NPRM is implemented as proposed. It is estimated that over 5 million, currently exempt, salaried employees will no longer qualify for their respective exemptions and be entitled to overtime pay.
NPRMs are subject to a 60-day comment periods, and properly submitted comments must be considered by the DOL before the final rule is announced. The DOL will then draft final regulations which take into account public comments. From start to finish this process can take upwards of several years, but sometimes it takes as little as a few months. The last time the DOL proposed changes to the overtime regulations was in 2003, and it took nearly 13 months to issue the final rules.
As such, the proposed salary hike is not an official regulation as of yet, and it may be altered in one way or another before it is finalized. It will, however, cover all workers, so employers should begin to review employee salaries for individuals who are being treated as exempt under one of the foregoing FLSA exemptions. When the new salary threshold is set, any such employees making less than the salary threshold will automatically be entitled to overtime pay, regardless of their job functions.
It is also important to review the other factors enumerated above for whichever exemptions are utilized by your company, as your exempt employees can file charges with the DOL to challenge their exempt status, if they feel that the required factors are not met.