DOL’s Proposed Overtime Rule
As we mentioned in our June E-Update, the Department of Labor has now issued its long-awaited revision to the regulations governing which employees are exempt from the requirement to pay overtime for all hours worked over 40 in a workweek.
The current overtime regulations set forth three tests, all of which must be met in order for a white-collar employee to be deemed exempt: (1) the employee must be paid on a salary basis; (2) the employee’s salary must be at least $455 per week (equaling $23,660 per year); and (3) a duties test specific to the exemption in question – executive, administrative or professional (EAP). There is also a highly-compensated employee exemption, under which an employee must make at least $100,000 per year and perform at least one exempt duty.
The proposed rule contains changes to the salary levels for the EAP and highly compensated exemptions. The DOL characterizes the salary level as “the single best test” of exempt status. The DOL proposes to set the EAP salary level at the 40th percentile of earnings for full-time salaried workers, which it has calculated at $951 per week, or $49,452 per year, using 2013 data. For those of you who have heard President Obama referring to a new salary requirement of $50,400 (or approximately $970 per week), his number is based on projected 2016 earnings. In the Notice of Proposed Rulemaking, the DOL states that the numbers contained in the proposed rule will be updated in the final rule, which would “likely rely on data from the first quarter of 2016.”
With regard to the highly compensated exemption, the DOL proposes to set the required salary at the 90th percentile of earnings for full-time salaried workers, which it calculates at $122,148. Again, this is based on 2013 data. Unlike what it did for the 40th percentile number, the DOL fails to calculate the projected 2016 number. If the same methodology as the 40th percentile increase is applied, however, this results in a 2016 salary in excess of $128,000 – a difference of some significance and certainly of interest to employers.
Unexpectedly and of particular note, the DOL proposes automatic increases to these salary levels, to be announced by the Secretary of Labor on an annual basis. The DOL is considering two possible options for the calculation of the increases. One is that the increases could be tied to the Consumer Price Index (a measure of inflation). The other is to fix the increase at the 40th/90th percentile of earnings each year. The DOL is soliciting input on which of the two methods should be selected for the final rule. Commentators, however, are questioning the validity of both proposed methods, noting that the DOL in the past has typically considered far more factors when establishing a new salary level, as it has done on 7 previous occasions (most recently in 2004).
In effect, although the DOL and the President have announced specific numbers for the salary levels, the DOL also states that these numbers are not the appropriate numbers. Moreover, these numbers will be subject to annual increases using a methodology that has yet to be determined. As one of our partners wryly noted, the DOL was supposed to issue a proposed rule, but has instead issued a proposed process.
Another major surprise is the DOL’s choice not to revise the duties tests, as had been widely expected. The DOL explains that the adjustment in the salary levels should be sufficient to address most of the concerns about the proper classification of employees as exempt or nonexempt, and is in line with the President’s directive to “simplify the exemption.” Nonetheless, the DOL is soliciting input on the current rules on the following specific issues:
- What, if any, changes should be made to the duties tests?
- 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?
- 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?
- 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?
- Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt 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 non-exempt work?
Of concern is the possibility that the DOL could revise the duties tests in the final rule, without having afforded the public the opportunity to review and comment on the actual revisions. Some commentators are suggesting that would violate the Administrative Procedures Act, which requires federal regulations to be subject to a notice and comment period. The issuing agency is then supposed to take the comments into consideration before issuing a final rule.
There will be a 60-day notice and comment period following publication of the Notice of Proposed Rulemaking in the Federal Register. Once the proposed rule is published at https://www.federalregister.gov/, you may submit comments electronically by clicking on the “Submit a Formal Comment” button on the Federal Register webpage for the proposed rule. DOL will subsequently issue the final rule. Although no date has been announced for the issuance of the final rule, we note that the proposed rule states that it will likely rely on data from the first quarter of 2016 in establishing the actual salary levels. This suggests that DOL does not anticipate issuing the final rule until at least late Spring 2016.