When President Obama directed the Department of Labor last year to make its Fair Labor Standards Act overtime regulations simpler for businesses and workers to understand, many observers expected the agency to propose comprehensive revisions to the confusing “duties tests.” After all, the duties tests, which are part of the criteria an employer must satisfy to show that an employee is exempt from FLSA’s overtime and minimum wage requirements, are famous for their imprecision and indifference toward the realities of the American workplace.
Instead, the DOL chose a much simpler route to the President’s mandated simplification: as I indicated in my post when the proposed regulations were first announced, the DOL avoided the duties tests entirely, and instead proposed simply disqualifying millions of currently exempt employees from exempt status based only on the amount of their salaries. While revised duties tests still may come – the DOL has said it is considering including changes to the tests in its final regulations – it is unusual for final regulations to differ substantially from their proposed form. The agency’s first volley focuses completely on salary level. Let’s take a greater look at the proposed changes.
First, the proposed salary level change would immediately disqualify millions of currently exempt employees from exempt status. It would more than double the required salary from the current level of $23,660 per year. Most employees who earn annual salaries of less than $50,440 would automatically be non-exempt, regardless of their job duties.
That widely reported $50,440 figure, by the way, actually is an estimate of the salary that would be required for an exemption under the revisions. The exact required salary level would be published in the final regulations at the amount representing the 40th percentile of wages for full-time non-hourly workers as determined by Bureau of Labor Statistics data.
Additionally, the salary level required for FLSA’s “highly compensated employee” exemption also would increase under the proposed regulations from $100,000 to about $122,148 annually, and would likewise be revised annually to remain at the 90th percentile of wages earned by full-time employees.
Finally, in a significant departure from current methodology under which the required salary level remains static until further regulatory revision, the DOL proposes that the salary level be increased automatically every year either by maintaining it at the 40th percentile of wages, or by tying it to the consumer price index. The DOL would publish the new salary level annually at least 60 days in advance of its revision.
About 4.6 million exempt employees would become non-exempt under the revised regulations, according to DOL estimates, “without some intervening action by their employers.” Also, the DOL believes that an additional 6.3 million workers who now earn sufficient salaries to qualify for exemptions, but who may not satisfy the duties tests despite being classified as exempt by their employers, would be reclassified as non-exempt under the new regulations because their non-exempt status would become clear without the need to examine their job duties. All told, DOL estimates suggest that the proposed changes will affect more than 9 percent of the American workforce.
The DOL predicts this change would cost U.S. employers as much as $1.3 billion a year in “transfer of income between employers and employees,” as well as about $250 million in “regulatory familiarization, adjustment costs, and managerial costs.” In calculating the costs of “regulatory familiarization,” the DOL assumed that the required regulatory review would be assigned to “mid-level human resource workers” who it estimates earn $23.63 an hour – an amount which, somewhat ironically, would not qualify them for an exemption under the new rules.
Most of the workers who would lose exempt status under the proposed change in the salary level are employed in professional and technical services, according to the DOL. Other significantly affected industries include health care, finance, retail trade, and insurance.
Although the DOL touts the President’s directive to simplify the regulations as one of its overriding motivations for the proposed revisions, it nonetheless proposes adding a few new terms for employers to learn.
Having determined that the terms “exempt” and “non-exempt” are “not intuitive and can be confusing,” the DOL now will sometimes refer to “non-exempt employees” as “overtime protected employees” or “overtime eligible employees.” “Exempt employees” will sometimes be called “not overtime protected” or “overtime ineligible employees.” The DOL intends still to use the traditional terms “as technical terms to ensure accuracy and continuity.”
The agency’s simplification efforts therefore have produced three terms for each status instead of one. Also, because these new terms refer only to overtime eligibility and not minimum wage eligibility, they may – in some circumstances – create confusion rather than lessening it.
The proposed regulations are open for public comment through September 4. Comments may be submitted electronically through the Federal eRulemaking Portal (http://www.regulations.gov), or by mail 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 NW, Washington, DC 20210. Comments must refer to Regulatory Information Number 1235-AA11. The DOL will consider timely comments in formulating its final regulations, which likely will be effective in early-to-mid 2016.