How the Department of Labor Plans on Making More Employees Eligible for Overtime Premium Pay

Wednesday, August 12, 2015

Question: Is the Department of Labor going to make more employees eligible for overtime premium pay?

Answer: Yes. The DOL has proposed revised Fair Labor Standards Act regulations that would convert many employees who are currently “exempt” under the executive, administrative, and professional (EAP) exemptions into “non-exempt” employees.

Question: How would the DOL’s proposed regulations convert currently “exempt” employees into “non-exempt” employees?

Answer: The conversion would occur as a result of increasing the salary level threshold for “exempt” EAP employees from the current level of $23,660.00 per year ($455.00 per week) to an amount that is projected to be approximately $50,440.00 per year ($970.00 per week) in 2016.

Question: What is the salary level threshold?

Answer: To qualify as an employee who is “exempt” from the requirement of being paid time and one-half overtime premium pay for hours worked in excess of 40 hours in a work week, an employee must be paid on a salary basis, must satisfy the duties test for the exemption, and must also be paid a minimum salary. Since 2004, that minimum salary – the salary level threshold – has been $455.00 per week. If an employee is paid less than that threshold, the employee cannot qualify for “exemption” from time and one-half overtime premium pay.

Question: Why does the DOL want to increase the number of currently “exempt” EAP employees who are eligible for time and one-half overtime premium pay?

Answer: The White House stated that “too many Americans are working long days for less pay than they deserve.” The salary level threshold has not been increased since 2004, and, as the White House has stated, that threshold “has failed to keep up with inflation.” If the threshold of $455.00 per week had kept pace with inflation since 2004, the current threshold would be $561.00 per week. Also, the DOL’s position is that, in any event, the 2004 threshold of $455.00 per week was too low and allowed employers to classify too many employees as “exempt.”

Question: What will be the effect of increasing the threshold from $455.00 per week to approximately $970.00 per week?

Answer: Any currently “exempt” employee who is paid more than $455.00 per week, but less than approximately $970.00 per week in 2016, will become a “non-exempt” employee and will be eligible for time and one-half premium pay for any hours worked in excess of 40 hours in a work week. Affected employees will include low level supervisory and managerial employees in the restaurant, retail, health care, and financial industries. The DOL estimates that 4.6 million employees will be affected by this change in the first year and that employers will have to pay those employees an additional $1.4 billion in that first year.

Question: Is the increase to $970.00 per week the only proposed change in the salary level threshold?

Answer: No. The DOL is also proposing that the salary level threshold will be automatically updated each year. It is considering indexing that threshold either to a fixed percentile of earnings for full-time salaried employees (40th percentile) or to changes in the cost of living (CPI-U). Between 2003 and 2013, indexing based on those methods would have resulted in an average annual increase of 2.6% (40th percentile) or 2.4% (CPI-U) in the threshold.

Question: Is the DOL proposing any change in the salary level threshold for “highly compensated exempt” (HCE) employees?

Answer: Yes. Since 2004, an employee in an EAP position who customarily and regularly performs at least one exempt duty and does not perform manual work is automatically “exempt” if the employee earns at least $100,000.00 in total annual compensation. The DOL proposes to increase the $100,000.00 threshold to $122,148.00, which would only affect approximately 36,000 in the first year. Then, the DOL proposes to automatically update or index that level by using the same method -- fixed percentile (for HCE employees, 90th percentile for full-time salaried employees) or changes in the cost of living (CPI-U) – that it selects for automatically updating the salary threshold for EAP employees.

Question: What are an employer’s options for avoiding the added expenses that will result from increasing the salary level thresholds?

Answer: Employers will need to assess their organizations and determine how to react in a best way for the business. Options for currently “exempt” employees who will be affected will include the following: reclassifying an employee as “non-exempt,” paying the employee on an hourly basis, and either paying time and one-half overtime pay or limiting or ending overtime; reducing overtime hours and possibly transferring the hours to employees who work fewer than 40 hours in a work week; hiring more part-time employees; reducing an employee’s pay, including discretionary pay, such as bonuses, so that after paying the overtime premium pay, the employee’s total pay remains roughly the same; increasing the salary of an employee who is close to the $970.00 level to an amount above $970.00 so that the employee remains “exempt.”

Question: Is the DOL considering any other changes that would affect “exempt” EAP employees?

Answer: Yes. It has not proposed any specific regulatory change, but the DOL is considering whether to require that an employee must spend a minimum amount of time, such as at least 50%, performing the “exempt” “primary duty” to qualify for an “exemption.” If the DOL makes this change, many more currently “exempt” employees would be converted into “non-exempt” employees.

Question: Does an employer have to take any immediate actions?

Answer: No. The DOL’s proposed regulations will not go into effect until sometime in 2016. In preparation, employers should analyze how many currently “exempt” EAP employees would be affected, should track the number of hours worked (regular and over 40 in a week) by “exempt” EAP employees now paid between $455.00 and $970.00 per week, and, most importantly, should consider possible counter-measures to mitigate the regulations’ impact.

For more information please contact the author of this client alert.

Gary Klotz

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