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Businesses and workers are closely following the proposed new federal regulations that will result in major changes to the so-called “white collar” exemptions to the overtime requirements of the Fair Labor Standards Act (“FLSA”).
On July 6, 2015, the U.S. Department of Labor (“DOL”) issued proposed new regulations that will significantly change the law governing certain “white collar” workers who are exempt from minimum wage and overtime pay. The DOL’s proposed rules will change the current regulations to more than double the current minimum salary level for exempt employees, significantly increase the salary level required for employees to be exempt from overtime as highly compensated employees, and automatically adjust that minimum salary level each year to account for the increase in the cost of living.
The DOL’s published timetable for publishing the final rule is July 2016. However, there is reason to think that the final rule might come sooner. In an interview on December 16, 2015, Labor Secretary Thomas Perez stated, “I'm confident we’ll get the final rule out by the spring of next year.”
Womble Carlyle is pleased to present this resource page to provide businesses with the latest information and updates on these highly anticipated proposed rules, including background information and references to key materials.
Under the Fair Labor Standards Act (“FLSA”), which is the federal wage and hour law, some employees may be classified as “exempt” from the Act’s minimum wage and overtime pay requirements. The most well-known and commonly used exemptions are the so-called “white collar” exemptions applicable to executive, administrative, and professional employees. The DOL’s proposed rules will change the current regulations to more than double the current minimum salary level for exempt employees, significantly increase the salary level required for employees to be exempt from overtime as highly compensated employees, and automatically adjust that minimum salary level each year to account for the increase in the cost of living. No exception is made for small businesses.
As a practical matter, the proposed regulations will mean that fewer employees will meet the requirements to be exempt from overtime (and thus will be entitled to overtime pay), or that employers must pay higher salaries in order for many employees to remain exempt under the FLSA. Here are the specific changes proposed to the white collar exemptions, which are expected to become final in 2016:
When it comes to wage and hour compliance, no law is more important than the FLSA, 29 U.S.C. § 201 et seq. The FLSA is the principal federal law governing wage and hour requirements for employers and employees. Enacted in 1938, the FLSA has set forth the core wage and hour requirements for workers and businesses for more than 75 years. According to the U.S. Congress that passed the FLSA as part of President Franklin Roosevelt’s New Deal, the purpose of this law is to “provide for the establishment of fair labor standards in employments in and affecting interstate commerce, and for other purposes.” 29 U.S.C. § 201, et seq.
The FLSA is very broad in scope and in coverage. The law governs, among other things, minimum wage, overtime pay, recordkeeping requirements, child labor standards, and equal pay in employment. The Act covers any business that is engaged in interstate commerce and has an annual gross income of $500,000 or more, and it also extends to public agencies, hospitals, health care facilities, and schools. 29 U.S.C. § 203(s).
Lawsuits under the FLSA are on the rise, particularly lawsuits claiming that workers are not properly classified as “exempt.” In those cases, the workers typically claim that because they were not truly “exempt” they were improperly denied overtime pay, and often seek years of back wages and overtime. This increased litigation is a result of plaintiffs’ firms pursuing collective actions against large multi-state employers, and due to the favorable penalty and attorneys’ fees remedies available in wage and hour cases.
Relevant to the purposes of this Resource Page, the FLSA sets forth specific overtime and minimum wage provisions for employers covered by the Act. As a general proposition, the FLSA places employees into two categories, exempt and non-exempt. “Exempt” employees are workers who are exempt from the FLSA’s overtime and minimum wage requirements. “Non-exempt” employees, on the other hand, are subject to the minimum wage and overtime requirements, and are therefore entitled to be paid minimum wage, and must be paid overtime when they work more than 40 hours in a week.
The largest category of exempt employees are those employed in the so-called “white collar” professions, which include certain executive, professional, administrative, outside sales, and computer positions. It is these exemptions which are the focus of the proposed regulations. (With regard to outside sales and computer employees, the proposed rules require salaried computer workers to be paid at the new, higher salary level. The current rules regarding outside sales employees are not changed.)
The text of the FLSA itself contains almost no discussion of the “white collar” exemptions. The Act simply states that the following employees are exempt from the minimum wage and overtime requirements: “[A]ny employee employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of outside salesman.” 29 U.S.C. § 213(a)(1).
Whether an employee qualifies as exempt under one of these “white collar” professions ultimately turns on the application of three regulatory tests. Over time, these three tests have become known as the “salary level test,” the “salary basis test,” and the “duties test.” In summary:
In 2004, the U.S. Department of Labor (“DOL”), which is the federal agency responsible for implementing and enforcing the FLSA, made significant revisions to the three regulatory tests for “white collar” professions. These revisions were the first major revisions to the FLSA in decades.
Until the new regulations become law, likely by 2016, the 2004 regulatory changes are controlling. The following is a brief summary of the current state of the law with respect to the executive, administrative, and professional exemptions. Changes that will result from the new regulations are noted where applicable.
A. Executive Exemption
An employee may be properly classified as exempt under the FLSA’s executive exemption if all of the following criteria are met:
See 29 C.F.R. § 541.100. “Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole. The DOL will not rely solely on a job description.
The regulations define “management” as including, but not limited to, activities such as interviewing, selecting, and training employees; setting and adjusting rates of pay or hours of work; directing the work of employees; maintaining production or sales records; appraising employees’ productivity and efficiency for purposes of recommending promotions; handling employee complaints and grievances; disciplining employees; planning the work; apportioning work among employees; etc. 29 C.F.R. § 541.102.
B. Administrative Exemption
An employee may be properly classified as exempt under the FLSA’s administrative exemption if all of the following requirements are met:
29 C.F.R. § 541.200. Work that is “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities. See 29 C.F.R. § 541.201. An employee may also qualify for this exemption if the employee’s primary duty involves the performance of work that is “directly related” to the management or general business operations of a customer. 29 C.F.R. § 541.201(c).
Furthermore, in perhaps the most frequently contested part of the test, the employee’s primary duty must also include the “exercise of discretion and independent judgment with respect to matters of significance.” The exercise of discretion and independent judgment involves comparing and evaluating possible courses of conduct, and then making a decision after considering all of the various possibilities. 29 C.F.R. § 541.202(a). In short, the ability to exercise discretion and independent judgment implies that the employee has authority to make an independent choice that is free from immediate supervision. The FLSA regulations set forth several factors which should be considered when determining whether an employee exercises “discretion and independent judgment”:
29 C.F.R. § 541.202(b). Having the requisite level of discretion and judgment does not mean that the employee’s decisions cannot be reviewed by upper management. Recommendations for action rather than actual taking action can suffice. The FLSA regulations expressly state that “the fact that an employee’s decision may be subject to review and that upon occasion the decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment.” 29 C.F.R. § 541.202(c).
While every job must be assessed independently, the following job positions generally satisfy the duties test for the administrative exemption: insurance claim adjusters; employees in the financial services industry; a “team leader” or employee that leads a team of other employees assigned to a major project; an administrative assistant or executive assistant to a business owner or senior executive if they have been delegated authority on matters of significance; human resources managers; and purchasing agents (with authority to bind the company on significant purchases). 29 C.F.R. § 541.203.
C. Professional Exemption
An employee may be treated as exempt under the professional exemption if the following criteria are met:
29 C.F.R. § 541.300. It is important to note that doctors, lawyers, and teachers do not have to meet either the salary basis test or the salary level test.
The FLSA regulations offer a non-exhaustive list of positions that generally qualify under the learned profession exemption. These include: Registered or certified medical technologists; registered nurses; dental hygienists; physician assistants; certified public accountants; culinary chefs; and licensed funeral directors and embalmers.
Workers in the following positions will generally qualify under the creative professional exemption: actors; musicians; composers; conductors; painters; novelists; essayists; and screenplay writers.
D. Highly Compensated Employees
An employee may be treated as exempt under the exemption for Highly Compensated Employees (“HCE”) if all of the following criteria are met:
At the directive of President Obama to “modernize and streamline” the white collar exemptions, the Wage and Hour Division of the DOL on July 6, 2015, published the proposed rules in a formal Notice of Proposed Rulemaking (“NPRM”) in the Federal Register entitled, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.” In essence, this NPRM presents proposed changes to overtime regulations, as discussed above.
In addition to the changes noted above, the proposed regulations would also automatically update the salary threshold for being an exempt employee and the salary threshold for being a HCE. 80 Fed. Reg. 38537. Until now, the salary level was not adjusted for cost of living, and the current rate ($23,660 per year) has been in effect since the last amendments to the regulations in 2004. The proposed regulations identify two alternatives for updating methodologies. The first proposed method, the “fixed percentile” approach, would annually update the thresholds based on fixed percentiles of earnings for full-time salaried workers. It would maintain the minimum salary threshold at the 40th percentile of the weekly wages of all full-time salaried workers. 80 Fed. Reg. 38540. The second proposed method would update the thresholds based on changes to the Consumer Price Index for All Urban Consumers (“CPI-U”). Id.
Of note, the proposed rules do not address two issues that many observers thought would be addressed. First, the proposed rules make no changes to the duties test for the exemptions, i.e., the primary type of work that must be performed in order to qualify for the executive, professional, and administrative exemptions. Second, the proposed rules do not address whether nondiscretionary bonuses may serve to satisfy a portion of the standard salary requirement. Instead, the DOL stated that it would continue to study these issues, and invited the public to offer comments to help inform the DOL’s consideration.
Reactions to the proposed regulations have been mixed. For example, workers’ rights organizations generally have supported the proposed rules. The AFL-CIO asserts that the proposed regulations would adjust existing protections of the FLSA for inflation, and the Center for American Progress asserts that the proposed regulations would strengthen the middle class, drive economic growth, and help Millennials attain financial stability.[i] On the other hand, many business organizations argue that the proposed regulations will hinder industry and job growth. The United States Chamber of Commerce states that the proposed regulations would “negatively impact small businesses and drastically limit employment opportunities.[ii] The National Retail Federation likewise opposes the proposed regulations, arguing that they would undermine customer service and harm job creation.[iii]
The Fair Labor Standards Act, 29 U.S.C. § 201 et seq.
Full text of the FLSA as published by the DOL (PDF form).
Full text of the FLSA as complied by LII (HTML form).
Current FLSA Regulations, “Defining And Delimiting The Exemptions For Executive, Administrative, Professional, Computer And Outside Sales Employees,” 29 C.F.R. Part 541
Complete FLSA regulations as currently in effect on the white collar exemptions, as published by the U.S. Government Printing Office.
December 2013 GAO Report
The U.S. Government Accountability Office (GAO) conducted a detailed study of the increasing trend of FLSA litigation, and recommended that the DOL “develop a systematic approach for identifying areas of confusion about the requirements of the FLSA that contribute to possible violations and improving the guidance it provides to employers and workers in those areas.”
President Obama’s Memorandum -- Updating and Modernizing Overtime Regulations, March 13, 2014
Presidential Memorandum announcing President Obama’s direction to the DOL to issue new regulations for the white collar exemptions.
Proposed New Regulations
Proposed FLSA Regulations: “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees” (7/6/2015) (HTML form)
Proposed FLSA Regulations: “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees” (7/6/2015) (PDF form)
Department of Labor Frequently Asked Questions on Proposed Regulations
DOL answers to frequently asked questions concerning the FLSA and the proposed regulations
Department of Labor Fact Sheet on Proposed Regulations
DOL fact sheet on the proposed rulemaking to update the regulations defining and delimiting the exemptions for “white collar” employees
Public Comment on Proposed New Regulations
Fair Labor Standards Act Law Blog
Womble Carlyle’s FLSA blog, bringing you FLSA news and commentary since 2008.
[i] Overtime, AFL-CIO, http://www.aflcio.org/Issues/Jobs-and-Economy/Wages-and-Income/Overtime; Sunny Frothingham, New Overtime Rule Could Raise Wages for 4.7 Million Millennial Workers, Center for American Progress (Aug. 24, 2015), https://www.americanprogress.org/issues/labor/news/2015/08/24/119749/new-overtime-rule-could-raise-wages-for-4-7-million-millennial-workers/.
[ii] U.S. Chamber Statement on Obama Administration’s Overtime Proposal, U.S. Chamber of Commerce (June 30, 2015), https://www.uschamber.com/press-release/us-chamber-statement-obama-administration-s-overtime-proposal.
[iii] Take Action, National Retail Federation, https://nrf.com/advocacy/policy-agenda/overtime.
Questions about the proposed new FLSA rules or other FLSA matters? Please contact one of our FLSA Team members.