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Labor and Employment Law | Womble Carlyle, Business Law /
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. Executive Summary
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:
Increase (by more than double) the current minimum salary threshold (currently $455 per week, or $23,660 per year) to $921 per week, or $47,892 per year. This amount will be adjusted annually by the DOL through published notice. Assuming these regulations become final in 2016, the minimum salary is estimated to be $970 per week, or $50,440 per year. Increase the minimum compensation for Highly Compensated Employees (“HCE”) from its current level ($100,000 per year) to $122,148 per year. Create an automatic, yearly adjustment mechanism for the minimum salary thresholds for the standard exemption and that for HCE. (The DOL is asking for public comments to guide its determination to use one or the other of two adjustment mechanisms.) The FLSA: Background and History
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. Overview of the FLSA’s “White Collar” Exemptions
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:
The salary basis test. The employee must be paid a predetermined and fixed salary that is not subject to deduction because of variations in the quantity or quality of work. (Note: This requirement does not apply to the outside sales classification.) The salary level test. The employee must earn a certain minimum salary per week. The current minimum salary is $455 per week. (Note: This requirement does not apply to the outside sales classification.) The duties test. The employee’s primary duties in his or her job must entail certain specific types of tasks. The employee’s actual job title does not matter. 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: The employee must be compensated on a salary basis at a rate not less than $455 per week (PROPOSED CHANGE: THE PROPOSED REGULATIONS WOULD INCREASE THIS AMOUNT IN 2016 TO $970 PER WEEK, OR $50,440 PER YEAR); The employee’s primary duty must be the management of the enterprise or of a customarily recognized department; The employee customarily and regularly directs the work of two or more “full-time” employees; and The employee has the authority to hire or fire other employees, or whose suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status are given particular weight. 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:
The employee must be compensated on a salary basis at a rate not less than $455 per week (PROPOSED CHANGE: THE PROPOSED REGULATIONS WOULD INCREASE THIS AMOUNT IN 2016 TO $970 PER WEEK, OR $50,440 PER YEAR); The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. 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”: Authority to formulate, affect, interpret, or implement management policies or operating practices; Carrying out major assignments in conducting the operations of the business; Performing work that affects business operations to a substantial degree, even if the employee's assignments are related to operation of a particular segment of the business; Authority to commit the employer in matters that have significant financial impact; Authority to waive or deviate from established policies and procedures without prior approval; Authority to negotiate and bind the company on significant matters; Providing consultation or expert advice to management; Involvement in planning business objectives; Investigation and resolution of matters of significance on behalf of management; and Handling complaints, arbitrating disputes, or resolving grievances. 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: Compensated on a salary basis of at least $455 per week (PROPOSED CHANGE: THE PROPOSED REGULATIONS WOULD INCREASE THIS AMOUNT IN 2016 TO $970 PER WEEK, OR $50,440 PER YEAR); and Primary duty is the performance of work that requires: Advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction (known as the “learned professional” exemption); or Invention, imagination, originality or talent in a recognized field of artistic or creative endeavor (known as the “creative professional” exemption). 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: The employee must earn total annual compensation of at least $100,000. (PROPOSED CHANGE: THE PROPOSED REGULATIONS WOULD INCREASE THIS AMOUNT TO AT LEAST $122,148 PER YEAR.) The employee’s total annual compensation must include at least $455 per week paid on a salary or fee basis. (PROPOSED CHANGE: THE PROPOSED REGULATIONS WOULD INCREASE THIS AMOUNT IN 2016 TO $970 PER WEEK.) The employee must customarily and regularly perform the exempt duties or responsibilities of an exempt executive, administrative, or professional employee. The employee’s primary duty must include performing office or non-manual work (non-management employees in occupations like maintenance and construction are not exempt under this section, regardless of rate of pay). Emerging and Undecided Issues
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. http://www.dol.gov/whd/regs/statutes/FairLaborStandAct.pdf Full text of the FLSA as published by the DOL (PDF form).
Current FLSA Regulations, “Defining And Delimiting The Exemptions For Executive, Administrative, Professional, Computer And Outside Sales Employees,” 29 C.F.R. Part 541 http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&amp;sid=48d6ee3b99d3b3a97b1bf189e1757786&amp;rgn=div5&amp;view=text&amp;node=29:3.1.1.1.23&amp;idno=29
December 2013 GAO Report http://www.gao.gov/products/GAO-14-69
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
http://www.whitehouse.gov/the-press-office/2014/03/13/presidential-memorandum-updating-and-modernizing-overtime-regulations
http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=28355&AgencyId=14 Proposed FLSA Regulations: “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees” (7/6/2015) (HTML form)
http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=28355 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
http://www.dol.gov/whd/overtime/NPRM2015/faq.htm DOL answers to frequently asked questions concerning the FLSA and the proposed regulations
Department of Labor Fact Sheet on Proposed Regulations http://www.dol.gov/whd/overtime/NPRM2015/factsheet.htm DOL fact sheet on the proposed rulemaking to update the regulations defining and delimiting the exemptions for “white collar” employees
[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.