President, U.S. Department of Labor Propose Steep Increase to Salary Floor for Exempt Employees

The Fair Labor Standards Act (FLSA) is the federal law governing the payment of minimum wage and overtime. Under the FLSA, all employees are required to be paid overtime after 40 hours of work each week unless the employee is exempted from the overtime requirement.

The most common exemptions are for those who hold executive, administrative or professional positions. (Certain other specified employees also are exempt.)  In general, in order to qualify for these exemptions from overtime under the current regulations, employees (1) must be paid on a true salary basis of at least $455 per week (or $23,660 per year); and (2) must perform exempt duties.

The $455 per week floor was established in 2004. On Tuesday this week, the President and U.S. Department of Labor proposed increasing the salary floor from $455 per week to $970 per week (or $50,440 per year) -- more than doubling the current level. Under the proposed rule any employee who is paid less than $970 per week would have to be paid overtime regardless of the employee’s duties.

Obviously, an increase of that magnitude would have a very substantial impact on employers. Based on a Bureau of Labor Statistics online calculator, if the $455 amount were adjusted for inflation, today it would be $572.80. The amount proposed -- $970 per week – far exceeds an inflation adjustment.

If this proposal is adopted, a vast number of employees who perform exempt work will nevertheless be required to be treated as hourly employees and paid overtime. In its Notice of Proposed Rulemaking, the Department of Labor proposed no changes to the exempt duties test but hinted that, in a future rulemaking, it might decide to relax the duties test. “The Department has long recognized the salary level test as ‘the best single test’ of exempt status.”  But all it did was hint -- there are no proposed changes to the existing duties test rules.

Additionally, the Department intends to adopt some sort of automatic escalator of the salary floor amount, but it has not decided how to calculate the escalator.

Comments on the proposed rulemaking will be taken by the Department of Labor for several months. We anticipate that the Department will receive thousands of comments, some of them very detailed and extensive concerning the impact on business. The Department is required to review and consider all of the comments. After doing so, the final rule will be adopted. The Department projects that it will adopt a final rule in the first quarter of 2016.

While the final amount of the exempt salary floor increase might vary from what’s been proposed, there is little question that it will be increased, probably substantially. Employers would be well advised to carefully review their exempt employee designations now in order to evaluate the impact of this proposed rule. There are a number of options for employers who wish to plan and budget for this coming change. Contact a member of our Labor and Employment group for more information.