Changes Coming to the FLSA Overtime Rules: Are You Ready?

August 5, 2015

Tammy McCutchenLittler | Washington DCtmccutchen@littler.com

A Short History of the Regulations

Fair Labor Standards Act

• Since it was passed in 1938, Section 13(a)(1) of the FLSA has included exemptions from both the minimum wage and overtime requirements for:– Executives– Administrative employees– Professionals – Outside sales employees

• “as such terms are defined and delimited from time to time by regulations of the Secretary”

Fair Labor Standards Act

• In 1996, Congress enacted a separate exemption for some computer employees, but did not give DOL similar authority to define and delimit this exemption– DOL did not recognize any computer employees as exempt until

directed by Congress in 1990 to issue regulations permitting computer systems analysts, computer programmers, software engineers and similarly-skilled workers to qualify for exemption

29 C.F.R. Part 541

• “White Collar” Exemptions• Executive• Administrative• Learned Professional• Creative Professional• Computer• Outside Sales

Three Tests for Exemption

• Salary Level• Salary Basis• Duties

Regulatory History – Salary Level

• From 1940 to 1975, DOL raised the minimum salary level for exemption every 5 to 10 years

• The 1975 salary levels remained in effect until 2004:– $155 per week for executive/ administrative– $170 for professionals– $250 for the short test

• In 2004, DOL eliminated the “long” and “short” test, instead adopting one standard test with a minimum salary of $455

Regulatory History – Duties Tests

• The original duties tests, published in 1938 were less than two pages long

• The duties tests were significantly revised in 1949, including the addition of the “short tests”

• In 1992, at the direction of Congress, DOL revised the duties tests to allow computer employees to qualify as exempt professionals

• In 2004, the duties tests for the other “white collar” exemptions were significantly revised for the first time in 55 years

Proposed Salary Levels

Minimum Salary Level

• Salary threshold set at the 40th percentile for all salaried employees– Currently, the 40th percentile is $921/week or

$47,892 annually– When a Final Rule is published in 2016, the

40th percentile is expected to increase to $970/week or $50,440 annually

• DOL seeking comments on the possibility of allowing nondiscretionary bonuses and commissions to satisfy up to 10% of minimum salary

It Could Have Been Worse

Highly Compensated Test

• Salary level for the highly compensated test to be set at the 90th percentile for all salaried employees– Currently, the 90th percentile is $122,148

annually– Again, the 90th percentile could increased by

the time the Final Rule is published in 2016

90%

Automatic, Annual Increases

• DOL proposes to establish a mechanism for automatically increasing the salary levels annually based either on the percentile (40/90) or inflation (CPI-U).

Is the 40th Percentile Reasonable?

1958 Methodology• DOL set the minimum

salary level to exclude the bottom 10% of all salaried workers, as obviously non-exempt

• If applied today, this methodology would result in a minimum salary level of $657/week ($34,164 annual)

2004 Methodology• DOL set the minimum

salary level by looking to the bottom 20% of salary levels in the South and in Retail

• If applied today, this methodology would result in a minimum salary level of $577/week ($30,004 annual)

Is $50,440 Reasonable?

California Minimum New York Minimum

$37,440 $34,124

Is $50,440 Reasonable?

Weekly Annual1938 $30 for all exemptions $505.97 $26,310.44

$30 for executive $509.58 $26,498.16$50 for administrative, professional $849.30 $44,163.60$55 for executive $549.55 $28,576.60$75 for administrative, professional $749.39 $38,968.28$80 for executive $658.28 $34,230.56$95 for administrative, professional $781.71 $40,648.92$100 for executive, administrative $777.14 $40,411.28$115 for professionals $893.71 $46,472.92$125 for executive, administrative $766.12 $39,838.24$140 for professionals $858.06 $44,619.12$155 for executive, administrative $685.13 $35,626.76$170 for professionals $751.43 $39,074.36

2004 $455 for all exemptions $572.80 $29,785.60

1975

Year Minimum Salary LevelAdjusted for Inflation

1940

1949

1958

1963

1970

Impact @ 40th Percentile

• DOL Economic Analysis

• National Retail Federation – Impact 2.2 million employees and cost up to

$9.5 billion in the retail industry alone

Employees Transfers Costs TotalYear 1 4.6 $1,482.5 $592.7 $2,075.2Year 2 4.7 $1,160.0 $181.1 $1,341.1Year 10 5.5 $1,339.0 $198.6 $1,537.6

(in Millions)

Proposed Changes to the Duties Tests

No Specific Changes to Duties

• The DOL “is not proposing specific regulatory changes at this time.”

• DOL “seeks to determine whether, in light of our salary level proposal, changes to the duties test are also warranted” and “invites comments on whether adjustments to the duties test are necessary...”.

But, DOL Seeking Comments

• What, if any changes, should be made to the duties test?

• 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?

DOL Seeking Comments Regarding CA Percentage of Time Test

• Should the DOL look to the State of California’s law (requiring that 50% 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% of an employee’s time worked a better indicator of the realities of the workplace today?

DOL Seeking Comments Regarding Reinstating Long/Short Duties

• Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees?

• Should the Department reconsider our decisions to eliminate the long/short duties test structure?

DOL Seeking Comments Regarding Concurrent Duties

• 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 lower-level executive employees performing nonexempt work?

DOL Seeking Comments Regarding Computer Professional Exemption

• DOL is requesting comments as to what additional occupational titles or categories as well as duties should be included as examples of computer professionals.

• DOL takes the position that a “routine help desk operator” does not qualify for any exemption

• An “information technology specialist” may be an example of an exempt administrative employee

DOL Seeking Comments On Examples Of Exempt and Non-Exempt Occupations

• Without specifying or providing any further information, DOL is requesting comments as to what additional occupational titles or categories as well as duties should be included as examples in the part 541 regulations.

Will DOL Change the Duties Tests?

• Does DOL’s failure to propose specific regulatory changes on the duties tests preclude them from making changes to those tests in the Final Rule?– An argument could be made that under the APA, DOL

is effectively precluded from making changes because they have not given the public notice and the opportunity to comment

– But, DOL has not stated that they will make no changes to the duties tests and has asked for comments on some specific changes

Will DOL Change the Duties Tests?

• In an email to Law360, DOL stated that “while no specific changes are proposed for the duties tests, the NPRM contains a detailed discussion of concerns with the current duties tests and seeks comments on specific questions regarding possible changes. The Administrative Procedure Act does not require agencies to include proposed regulatory text and permits a discussion of issues instead.

Impact of Delay in Announcing Specfic Changes to Duties Tests

• Lose benefit of note and comment period to react and get ready for any changes to duties test

• Possible litigation regarding Department’s failure to comply with formal rulemaking

• Lack of clear guidance for employers to make compliance decisions regarding potential reclassifications

Regulatory Process & Timelines

Regulatory Process

• Notice of Proposed Rulemaking• Comment Period• Final Rule• Effective Date• Litigation?

Predicted Timeline

2003 Actual2015

Actual/Prediction

Date Days Date Days

NPRM Published 31-Mar-03  06-July -15 

Comment Period Ends 30-Jun-03 90 04-Sept-15 60

Final Rule Published 23-Apr-04 293 2-Mar-16 180

Effective Date 23-Aug-04 120 30-Jun-16 120

Other Considerations

• DOL has heard concerns related to the use of electronic devices by white collar workers who may be newly entitled to overtime pay as a result of this rulemaking.

• Takes the position it is beyond the scope of this rulemaking.

• DOL will publish a Request for Information (RFI) seeking information on the use of electronic devices by overtime-protected employees outside of scheduled work hours.

• DOL anticipates issuing the RFI in August 2015.

Preparing for Change

What Should Employers Do?

Participate in the Regulatory Process

• Review the NPRM– The NPRM, along with a Fact Sheet and FAQs, are

available on the Department of Labor’s website at www.dol.gov/whd/overtime/NPRM2015/

• Support the efforts of your trade associations• Visit and write to your Senators and

Representatives• Submit comments on the NPRM @

– http://www.regulations.gov/#!documentDetail;D=WHD-2015-0001-0001

Start Preparing for New Regulations

• Don’t wait for the Final Rule• Start reviewing exempt status of employees

based on:– Salary increase to $50,440– California-style over 50% primary duties test– Elimination of concurrent duties section

• Communicate impact of salary increase and duties test changes to business leaders

• Start planning for reclassifications

Monitor Developments

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Questions & Answers

Tammy McCutchenLittler | Washington DCtmccutchen@littler.com