Employers nationwide should prepare for a new Department of Labor (“DOL”) proposed rule (“the Rule”) that will revise current overtime exemption requirements under the Fair Labor Standards Act and expand overtime eligibility to millions of employees. On June 30, 2015, the DOL rolled out information on its website regarding the Rule that has not yet been published in the Federal Register, but will likely go into effect in 2016. Under current law, employees who are paid at least $455 per week ($23,660 per year) and perform executive, administrative, professional, or computer professional type work may be exempt from overtime pay. The Rule will increase the pay threshold to an estimated $50,440 per year in 2016, a change that the DOL estimates will expand overtime eligibility to nearly five million employees within the first year of implementation.
The Rule will likely give employers headaches for years to come, as the increased threshold is not a one-time event. Specifically, the Rule will include “a mechanism to automatically update the salary and compensation thresholds on an annual basis using either a fixed percentile of wages or the CPI-U (Consumer Price Index for Urban Consumers).” The Rule proposes a standard salary level of the 40th percentile of weekly earnings for full-time salaried employees. This means that employers will have to engage in a yearly review of their employees’ pay to determine overtime eligibility. Additionally, although the Rule is silent on bonuses, the DOL seeks comment on whether to allow nondiscretionary bonuses, such as performance bonuses, to be included in determining whether an employee’s salary is sufficiently high for the overtime exemption.
In addition to increasing the required salary for the exemption, the Rule will also alter the salary required to be considered a highly compensated employee. Currently, the test for exemption is relaxed for employees who are paid at least $100,000 per year. The Rule is expected to increase the required amount to be considered a highly compensated employee to $122,148 per year (the 90th percentile for full-time salaried employees).
While the Rule does not seek to change the standard duties test for determining whether an employee performs exempt work, the DOL seeks comment on “whether the current duties tests are working as intended.” Under current law, there is not an explicit requirement for how much exempt work an employee must perform to meet the job duty portion of the overtime exemption equation. Employers should watch for future changes to the duties tests that may require overtime pay for even more employees.
The DOL estimates that employers will face direct costs between $239.6 and $155.3 million per year once the Rule takes effect.
Employers should stay alert in the upcoming weeks and voice their opinions by commenting on the rule once it is published in the Federal Register at http://regulations.gov. Employers should also prepare for the rule’s expected implementation in 2016, and review their employees’ pay and duties to avoid any potential wage and hour claims in the years ahead.
This client alert is intended to inform clients and other interested parties about legal matters of current interest and is not intended as legal advice.