Friday, July 10, 2015

Department of Labor Issues New Proposed Salary Level Rules For White Collar Exemptions

On Monday, July 6, 2015, the U.S. Department of Labor issued its long-awaited proposed rules for “defining and delimiting the exemptions for executive, administrative, professional, outside sales, and computer employees” under the federal Fair Labor Standards Act.  Written comments are due by September 4, 2015.  It is expected that final rules will be issued approximately 90 days following the submission of written comments.

As a general rule, employees are required to be paid overtime (at one and one-half times the regular rate) for hours worked in excess of 40 in a week.  To qualify for one of the “white collar” exemptions from the overtime requirement, an employee must meet three tests:  (1) the employee must be paid on a “salary basis” – the “salary basis test”; (2) the amount of the salary paid must meet a specified minimum amount – the “salary level test”; and (3) the employee’s primary job duties must qualify him as an executive, administrative, or professional employee.
The new proposed rules deal primarily with the salary level test.

Under current rules, established in 2004, an employee must be paid at least $455 per week ($23,660 per year) to meet the salary level test.  The proposed new rules set the minimum salary level for exempt status at $921 per week, or $47,892 annually.  This level equates to the 40th percentile of earnings for full-time salaried workers in the United States as of 2013.

Current rules also establish an exemption for “highly compensated” employees.  If an employee is paid at the minimum salary level for highly compensated employees, exempt status will be established if the employee meets only one of the duties required by the duties test.  In other words, if compensation is high enough, the duties test is relaxed.  Currently, the salary level for highly compensated employees is $100,000.  The new rules propose that that level be increased to $122,148 annually, which is the 90th percentile of earnings for full-time salaried workers in 2013.    

In its summary statement, the Department of Labor states that “[b]ecause the current salary level is only screening from exemption approximately 15 percent of overtime-eligible white collar salaried employees, it is not an effective test for exemption.”  It further states that “[t]he proposed increase in the standard salary level would increase the number of overtime-eligible white collar salaried employees who meet the duties test and earn less than the proposed salary level [from approximately 4 percent] to approximately 25 percent.”

In publishing the proposed rules, the Department is trying to establish more of a “bright line” test for exempt status.  Recognizing that the salary level test is easily applied, whereas the duties test often creates confusion and litigation, the Department is trying to reduce reliance on determining exempt status from the employee’s duties and increase reliance on salary as a determining factor.

In addition to establishing new standard and highly compensated salary levels, the Department also proposes to establish a formula for automatically updating the salary levels.  Two possible formulae are suggested, one based on maintaining the 40th (or 90th) percentile of earnings for full-time salaried workers, and the other based on the consumer price index (CPI-U).  The Department invites comment on the formula.

Rather than dealing substantively with the duties test in the proposed rules, the Department is requesting comment on the following issues:

A.  What, if any changes should be made to the duties test?
B.  Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption?  If so, what should that minimum amount be?
C.  Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model?  Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?
D.  Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees?  Should the Department reconsider our decision to eliminate the long/short duties tests structure?
E.  Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and non-exempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption?  Alternatively, should there be a limitation on the amount of nonexempt work?  To what extent are exempt lower-level executive employees performing nonexempt work?

In its comments, the Department of Labor addresses the impact of the proposed new regulations on “small entities”, including small units of local government.  As applied to governments, small entities are defined as “the governments of cities, counties, towns, townships, villages, school districts, or special districts with population of less than 50,000 people.”  The Department estimates that the new rules will affect some 4.7 million workers.  Among affected workers, the Department estimates that 1.8 million are employed by small entities, including small local government entities.

While the Department’s comments indicate quite clearly that it does not favor special treatment of small entities in the rules, it is requesting consideration of the following alternatives:  

i. Differing compliance or reporting requirements that take into account the resources available to small entities.
ii.  The clarification, consolidation, or simplification of compliance and reporting requirements for small entities.
iii.  The use of performance rather than design standards.
iv.  An exemption from coverage of the rule, or any part thereof, for such small entities.

Whether or not the Department will consider any special rules applying to small entities, it is important for small governments to make their voices heard during the comment period.  This is especially true with respect to some of the suggestions relating to modification of the duties test.  A small municipality, for example, may have only a handful of employees, many of whom are given exempt-level titles.  But because of the small number of employees available to meet the needs of the public, employees with exempt-level salaries (even under the new proposed standards) and exempt-level titles (such as public works director) nonetheless often are required to perform significant amounts of manual labor, for the simple reason that there is no one else to do it.  

Comments on the proposed rules, identified by Regulatory Information Number (RIN) 1235-AA11, should be submitted by September 4.  They may be submitted by e-mail through the Federal eRulemaking Portal  Or they may be submitted in writing to Mary Ziegler, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue N.W., Washington, D.C. 20210.  Only one copy need be submitted, using only one of the two methods.  Comments will be part of the public record.