chevron-down Created with Sketch Beta.
    January 08, 2016 Articles

    What the DOL's Proposed Changes to the White-Collar Exemption Rule May Mean for Employers

    The proposed changes may cost employers billions of dollars.

    By Sonya Kwon and Jeremy Guinta

    On July 6, 2015, the Department of Labor (DOL) proposed a rule that will more than double the minimum salary necessary for a worker to be classified as “exempt” under the white-collar exemption provision of the Fair Labor Standards Act (FLSA). The proposed changes will affect the minimum salaries individuals must make to be exempt from overtime, and they have the potential to cost employers billions of dollars.

    Food service and hospitality are the likely industries to feel the greatest impact from the proposed rule change. Median salaries for servers and food service mangers are currently below the proposed threshold. Preschool education administrators and directors could also be affected.

    If the current proposed rule is adopted and the salary threshold for the white-collar exemption increases, many employees could gain nonexempt status. Employers should revisit current employee duties and salary levels and determine which employees should be classified as exempt. It is important to be aware that the annual salary threshold may increase from year to year based on the DOL’s methodology, which could lead to employees’ salaries rising or the disqualification of employees from exempt status.

    Proposed Rule Changes
    The DOL has proposed three rule changes that affect who can be classified as exempt employees:

      1. The increase to $970 per week, or $50,440 annually, reflects a standard salary level equal to the fortieth percentile of earning for full-time salaried workers. Wage & Hour Div., DOL, Fact Sheet: Proposed Rulemaking to Update the Regulations Defining and Delimiting the Exemptions for “White Collar” Employees.

    Currently, the minimum salary necessary to qualify for the exemption is $455 per week. The proposed change doubling the minimum threshold amount significantly affects who can be classified as exempt. This rule will likely affect the retail, hospitality, and sales industries the most because managers in those industries work long hours and make significantly less than the new proposed threshold.

      2. The proposed rule would increase the total annual compensation requirement needed to exempt highly compensated employees to the annualized value of the ninetieth percentile of weekly earnings of full-time salaried workers ($122,148 annually). Defining and Delimiting the Exemptions for Executive, Administration, Professional, Outside Sales and Computer Employees, 80 Fed. Reg. 38,516, 38,537 (proposed July 6, 2015).

    This proposed rule change is provide an offset for any individual who may lose his or her nonexempt status because of high individual earnings. This exemption currently applies to an employee who earns a total annual compensation of $100,000 or more and who customarily and regularly performs any one or more of the exempt duties.

      3. The proposed rule would establish a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption. Id.

    This proposed change will update the minimum threshold so that as wages rise, employees will not lose their nonexempt status, either by maintaining the salary levels at a fixed percentile of earnings or by updating the amounts based on the consumer price index (CPI).

    Another component of the white-collar exemption is the duties that an individual performs—the amount of time and the types of duties. See Wage & Hour Div., DOL, Frequently Asked Questions: Overtime NPRM, Duties Test. The DOL has stopped taking comments on whether or not changes to the duties test should be implemented. It is considering the following issues, which will be determined during the final rulemaking:

      1. Should there be a minimum amount of time spent by employees as it relates to their primary duty? If yes, what is that amount?

      2. Should the DOL adopt the California state law that requires employees to perform their primary duty at least 50 percent of the time or a similar model?

      3. Should the DOL consider a long/short term duties test model?

      4. Is the concurrent duties regulation of executive employees (which allows for employees to work both exempt and nonexempt duties concurrently) appropriate?

    Who May Be Affected? 
    Employers may choose to meet the new threshold requirements by increasing the salaries of currently exempt employees or converting currently exempt employees to a “nonexempt status” and paying overtime. All else being equal, raising salaries could cost food service, hospitality, and preschool education employers $1.3 billion in these three job classifications alone. For this analysis, Navigant considered the tenth percentile, the twenty-fifth percentile, and median annual salary of each job classification, and compared the difference between those percentiles to the proposed new minimum of $50,440. We calculated the difference between each of the percentile annual salaries and the proposed minimum times the number of employees within each percentile range.

    Other costs and regulatory issues would also be faced should employees convert from exempt to nonexempt status. The following are some examples:

    • overtime payments
    • meal and rest Break violations
    • regular rate issues

    Most likely, employers may offset direct labor costs by reducing wages, changing pay structure, changing schedules or hours, or even converting employees from full-time to part-time.

    What Would Happen If the DOL Indexed the Salary Test to the Consumer Price Index?
    One of the proposed rules is to establish a mechanism to update salary levels to ensure a useful and effective test for exemption. One potential way to do this is to link salary growth to the CPI. Based on the average CPI, a conservative growth projection shows that income thresholds will rise to $63,777 by 2025, a difference of $13,337 over 10 years. (An average percentage growth of 2.37 percent was calculated based on core CPIs from 1995 to 2014 as reported in the Bureau of Labor Statistics’ Inflation & Prices databases.) This indicates that the minimum threshold could increase each year. Employers will need to be aware of these changes, which will continue to affect employees as the threshold rises.

    Figure 1

    Income Projections (2015-2025)

    Keywords: litigation, employment law, labor relations, exempt employee, nonexempt employee, white collar exemption, DOL, proposed rule

     

    Sonya Kwon and Jeremy Guinta are with Navigant Consulting in Los Angeles, California.


    Navigant Consulting is the Litigation Advisory Services Sponsor of the ABA Section of Litigation. This article should be not construed as an endorsement by the ABA or ABA Entities.

    Copyright © 2016, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).