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U.S. Department of Labor Announces Proposed Revision to Rule on Overtime Exemptions; Exempt Salary Threshold to More than Double; No Immediate Action Needed

On July 1, 2015 by Schnader in Labor and Employment

By Scott J. Wenner

The U.S. Department of Labor posted an announcement on its website this morning that its much anticipated proposed rule to curtail existing overtime exemptions had been approved for publication in the Federal Register as a Notice of Proposed Rulemaking (NPRM), and would be published soon. In the interim, the DOL website posted a link to the approved version of the rule, available here.

According to the DOL’s announcement, the centerpiece of the proposed rule, which is intended to increase the number of employees who are eligible for overtime compensation, will be an increase of the minimum salary required to qualify as exempt to around $50,440 per year. If the rule becomes final, the increase will more than double the present threshold of $23,660. Computed on a weekly basis, the minimum weekly salary for exemption will increase from $455 per week to about $970 per week.

The DOL maintains that this dramatic increase is necessary if the exempt classifications under the FLSA are to be defined as originally intended: to exempt “highly compensated executive, administrative, and professional employees” from eligibility for overtime compensation. According to the NPRM, the weekly salary threshold it proposes is at the 40th percentile of average weekly wages of full-time salaried employees according to the Bureau of Labor Statistics. Further, to keep the minimum salary from lagging behind in the future, the NPRM proposes to update the minimum annually, either by indexing it to the CPI-U or by maintaining it at the 40th percentile of average weekly wages of full time salaried employees.

The NPRM also announced that the DOL would like to receive comments during the comment period on whether nondiscretionary bonuses should count toward the minimum salary requirement – an issue that inevitably arises in view of the steep increase in the salary threshold.

To be exempt as an executive, administrative or professional employee, of course, the employee must satisfy both the “salary basis test” (which includes receipt of the specified minimum amount) and the “primary duty test” (which examines the character of the primary duties of the employee’s position).   After President Obama directed the Secretary of Labor in early 2014 to update the existing regulations governing the so-called “white collar exemptions,” a substantial increase to the minimum salary was widely expected, but many also anticipated a tightening of the duties test to further restrict qualification for exempt status.

The unofficial version of the NPRM posted today makes no change to the duties test. However, it announces that “the Department is considering whether revisions to the duties tests are necessary in order to ensure that these tests fully reflect the purpose of the exemption.” The DOL may envision proposing a separate rule to limit the availability of exempt status to a smaller group of higher paid employees and a revision to the primary duty test might be proposed after the doubling of the minimum salary threshold becomes final. The effective date of this increase remains uncertain. The NPRM to be published in the Federal Register will announce a comment period that must precede publication of a final rule by the agency. Further, the DOL must consider the comments it receives before publishing a final rule. The NPRM’s wording suggests that it is aiming to publish a final rule in 2016.