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Department of Labor Announces Proposed Regulations on Overtime Exemptions

On June 30, 2015, the Department of Labor announced its long-awaited proposed revisions to exemptions from overtime under the Fair Labor Standards Act (“FLSA”). Currently, in order to meet the requirements of the so-called “white-collar” exemptions, individuals must meet certain qualifications as to their primary duties, as well as requirements related to the salary or fees paid for the work. The proposed regulations address proposed increases in the wages employees must earn to be eligible for a potential white-collar exemption.

Under the current regulations, if an employee meets the primary duties test under any exemption and is paid by salary, the employee is eligible for exempt status as long as he or she is paid at least $455.00 per week. The proposed regulations seek to increase this amount for professional, executive, and administrative exemptions to $921.00 per week, or $47,892.00 annually. This amount is the 40th percentile of weekly earnings of full-time salaried employees.

In addition, the proposed regulations would require that the salary threshold be recalculated each year, based either on a percentile of weekly earnings for full-time salaried employees or on a rate tied to inflation. This figure would be published 60 days in advance of the needed change. An automatic increase has never before been part of the exemption test. This change could require employers who have exempt employees very close to the salary threshold to give automatic raises each year in order to retain the exemption for those employees.

The proposed regulations also address the computer professional and highly-paid executive exemptions. If your company has employees only in Pennsylvania, you may not use either of these exemptions, because they are not recognized in Pennsylvania. If you have employees in other states, please note that the proposed regulations retain the $27.63 per hour rate for employees subject to the computer professional exemption, because this amount was specifically set by the FLSA, and cannot be changed by regulation. The proposed regulations change the salary threshold for highly compensated employees from $100,000.00 to $122,148.00, which also will be revised on an annual basis. If the employer anticipates that an employee will fall within the highly-compensated exemption, but, at the end of the year, the employee falls short, for example, if he or she did not earn the expected amount of commissions, the employer has the option, within one month after the end of the year, to make a payment equal to the amount that would bring the employee to the salary threshold for this exemption. Alternatively, the employee may fit within a different exemption.

The proposed regulations also provide that an employer may pay an exempt employee additional compensation without losing the exemption or violating the salary basis requirement, as long as there is a guarantee of at least the minimum weekly required salary amount paid in salary.

Under the proposed regulations, an exempt employee’s salary may be computed on an hourly, daily, or shift basis without losing the exemption, if there is a guarantee of at least the minimum weekly required amount paid of a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek. The reasonable relationship test applies only if payment is computed on an hourly, daily, or shift basis.

To determine if an employee paid on a fee basis is eligible for exemption, the proposed regulations will require calculating the amount of work it took to produce the product for which the fee is paid, and determine the hourly rate on that basis, and then calculate whether the hourly rate would be sufficient to meet the threshold requirement had the employee worked a 40-hour week. The example given in the proposed regulations is as follows: based on a salary threshold of $921.00, if an artist is paid $500.00 for a picture taking 20 hours to complete, the threshold would be met. ($500.00 ÷ 20 = $25.00 per hour x 40 hours = $1,000.00 per week, which is more than the $921.00 threshold.)

While the proposed regulations do not address the primary duty prong of the test for white-collar exemptions, the Department of Labor is seeking input about primary duties. The Department has hypothesized that, if the salary threshold is high enough, the primary duties may not need to be addressed with greater specificity. It is inviting comments regarding whether changes to the duties test are needed, particularly in light of the proposed change to the salary threshold. The Department has posed questions, including whether any changes need to be made to the duties test; whether employees should be required to spend a minimum amount of time performing their primary duties; and whether the regulation which allows executives to concurrently perform exempt and nonexempt duties should be modified.

Public comment on the proposed regulations will be allowed for sixty days from the date the proposed regulations are published in the Federal Register. Electronic comments may be submitted at http://www.regulations.gov.

What Does This Mean For You? The proposed regulations are not yet law, and will not go into effect until the Department of Labor has had the opportunity to review public comments, and make any changes based on those comments. However, this is a good time to review your company’s practices regarding overtime, and to review all positions that you believe currently are exempt. When the regulations are final, many positions that currently are exempt may no longer qualify for an exemption. You will need to consider whether you have employees who should be reclassified as nonexempt, how that will affect your workplace, and whether you need to reconfigure your workforce based upon the proposed changes.

If you have any questions, or need assistance in assessing your exempt workforce, please contact Whitney Rahman at (717) 509-7237 or at swr@blakingerthomas.com.

**This update is provided for informational purposes only and should not be construed as legal advice or as creating an attorney-client relationship where one does not already exist**