Employment Law. Making Work Pay (More): DOL Increases Salary Threshold And Hints That Final Regulations Might Rewrite Duties Test For FLSA Exemptions

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1 MEALEY S TM LITIGATION REPORT Employment Law Making Work Pay (More): DOL Increases Salary Threshold And Hints That Final Regulations Might Rewrite Duties Test For FLSA Exemptions by Jason Habinsky and Adam Sencenbaugh Haynes and Boone, LLP New York A commentary article reprinted from the August 2015 issue of Mealeys Litigation Report: Employment Law

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3 MEALEY S LITIGATION REPORT: Employment Law Vol. 12, #1 August 2015 Commentary Making Work Pay (More): DOL Increases Salary Threshold And Hints That Final Regulations Might Rewrite Duties Test For FLSA Exemptions By Jason Habinsky and Adam Sencenbaugh [Editor s Note: Jason Habinsky is a partner with the law firm of Haynes and Boone, LLP in New York. Adam Sencenbaugh is an associate with the law firm of Haynes and Boone, LLP in Austin, Texas. Both are members of the firm s Labor and Employment Practice Group and have broad experience handling complex wage and hour matters. Any commentary or opinions do not reflect the opinionsofhaynesandbooneorlexisnexis,mealey s. Copyright # 2015 by Jason Habinsky and Adam Sencenbaugh. Responses are welcome.] The Obama administration spent more than a year teasing major changes to the white collar exemptions of the Fair Labor Standards Act ( FLSA ). But when the planned revisions were finally announced, they were more notable for what remained the same than any proposed change. Yet it is clear that the agency has only presented half the story, and even broader revisions to the FLSA exemptions are likely to be announced with the final rule following the comment period. On July l6, 2015, the U.S. Department of Labor ( DOL or Department ) published its highly anticipated proposed changes to the overtime pay regulations of the FLSA which are predicted to broaden coverage to nearly 5 million additional workers. The proposal would more than double (to over $50,000) the salary an employee must be paid to qualify for the white collar exemptions and increase the salary threshold for highly compensated employees to over $122,000 per year. The DOL passed on an opportunity to detail any revisions to the complex duties test for applying the white collar exemptions, opting instead to invite comments from stakeholders as to whether any modifications to the test are needed. I. Background Of FLSA Exemptions Under Current Law The FLSA requires covered employers to pay employees at least the federal minimum wage for all hours worked and overtime pay for any hours worked over 40 in a workweek. However, the FLSA provides numerous exemptions from these minimum wage and overtime pay provisions, including exemptions for executive, administrative, and professional ( EAP ) employees. The logic behind the EAP exemptions is that these employees typically receive greater monetary and nonmonetary benefits than blue collar or lower-level office workers. Therefore, they are less likely to need the FLSA s protections. To qualify for one of the EAP or white collar exemptions, the employee must be paid a predetermined minimum salary and the employee s job must primarily involve executive, administrative, or professional duties ( duties test ). Under current regulations, an employee must be paid a salary of at least $455 per week ($23,660 per year) to meet the standard exemption. This figure has not been updated since 2004, and is now slightly below the 2014 poverty threshold for a family of four. In order to meet the corresponding exemption for highly compensated employees, such an employee must earn at least $100,000 in total annual compensation and meet a less onerous duties test. II. Proposed Changes To The Salary Level Test The DOL s proposed rule would increase the salary threshold for the standard white collar exemptions to 1

4 Vol. 12, #1 August 2015 MEALEY S LITIGATION REPORT: Employment Law the 40th percentile of weekly wages for all full-time salaried employees, or approximately $970 per week (over $50,000 per year). The proposal would also increase the salary threshold for highly compensated employees to the annualized value of the 90th percentile of weekly wages of all full-time salaried employees (over $122,000 per year). The proposal also includes a mechanism to increase these salary levels to ensure they remain current. The DOL s explicit goal is to reduce the number of workers for whom employers must apply the duties test to determine exempt status and make it easier for employers to conclude that more employees are not subject to the exemption. In calculating salary under the standard exemption, the DOL has historically instructed employers to count only actual salary and fee payments, excluding bonus payments of any kind. Although this rule is not explicitly changed in the proposal, the proposed regulations indicate the DOL now is considering whether to include nondiscretionary bonuses and incentive payments toward satisfying the salary test. The DOL is not, however, considering discretionary bonuses, or any change to the exclusion of board, lodging, or payments for medical, disability, life insurance, or contributions to retirement plans from the calculation. III. Hints Of Future Changes To The Duties Test Despite widespread speculation, the proposed regulations do not modify the standard duties test for the white collar exemptions, which examines whether the employee s job primarily involves executive, administrative, or professional duties. The DOL has long recognized that employees in lower-level management positions are often classified as exempt and thus ineligible for overtime pay even though they are spending a significant amount of their workday performing nonexempt work. The Department is particularly concerned with employers who rely heavily on the concurrent duties test under the executive exemption, which permits employees to perform both exempt and nonexempt tasks so long as the exempt duties are sufficiently important to nonetheless be considered the employee s primary duty. Classifying junior managers in the retail and food services industries as exempt (particularly when those employees spend only a fraction of their time performing exempt duties) has led to recurring litigation. Commentary within the proposed regulations reflects the Department s belief that when a disproportionate amount of an employee s time is spent on nonexempt duties the employee should not be classified as an exempt EAP employee. To target this issue, the Department suggested in the proposed regulations that it might adopt Californiastyle rules that would require 50 percent of an employee s time be spent exclusively on work that is the employee s primary duty to qualify for an EAP exemption, not counting time during which nonexempt work is performed concurrently. However, the DOL did not propose regulatory changes to actually make that revision. Instead, the Department invited comments from stakeholders on: (1) whether employees should be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for the exemption; (2) whether the Department should adopt a rule requiring that 50 percent of an employee s time be spent exclusively on work that is the employee s primary duty to qualify for the exemption; and (3) whether the concurrent duties regulation for executive employees should be modified to avoid sweeping truly nonexempt employees into the exemption. The Department s pointed request for comments suggests a desire by the DOL to include significant revisions to the duties test in the final rule. Many stakeholders have vociferously complained that the Department is playing games with the regulation by not announcing its intended changes to the duties test dodging the political heat during the comment period and waiting for the final rule to reveal its position. But the Administrative Procedure Act provides the DOL wide latitude between the proposed rule and the final rule. The Department has the power to issue a final rule that differs significantly from a proposed rule so long as it is a logical outgrowth of the initial proposal. A significant change is permissible so long as affected parties should have anticipated that the relevant modification in the final rule was possible from the published proposed rule. The DOL can even adopt a final rule that is diametrically opposed to a proposed rule if the agency indicated that it was considering that alternative. The DOL s wide open call for comments will give it tremendous freedom in revising the duties 2

5 MEALEY S LITIGATION REPORT: Employment Law Vol. 12, #1 August 2015 test and opens the door for adoption of significant modifications including the California rule. Interested parties may submit comments on or before September 4, Several months thereafter, the DOL will issue the final rule, with an effective date to occur several months after the final rule s promulgation. Although these proposed regulations are not final and, consequently, are subject to change, employers can start to evaluate how the proposed change to the salary threshold will affect their workplace. For example, employers can immediately review current salaries to determine how many exempt employees would fall under the proposed salary threshold and therefore no longer qualify for exemption. Because these changes could have a substantial effect on overhead costs, budgets, and the overall bottom line, employers can begin to estimate the potential increase in overtime pay or increased salary to meet the new test. Employers also should keep the proposed salary threshold in mind when deciding how much to pay new hires, as well as how to structure any salary increases and incentive compensation in the interim. Endnotes 1. Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 80 Fed. Reg (July 6, 2015) (to be codified at 29 C.F.R. pt. 541) U.S.C U.S.C. 213(a)(1) exempts from both minimum wage and overtime protection any employee employed in a bona fide executive, administrative, or professional capacity...or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of [the Administrative Procedure Act]...). 4. See, e.g., In re Family Dollar FLSA Litigation, 637 F.3d 508, 517 (4th Cir. 2011) (retail manager considered exempt whether collecting cash, sweeping the floor, stocking shelves, working with employee schedules, or running a cash register); Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233, 1249 (11th Cir. 2008) (store managers not exempt where they spent most of their workday performing manual labor, not managerial tasks). 5. Ass n of Private Sector Colleges & Universities v. Duncan, 681 F.3d 427, 442 (D.C. Cir. 2012). A final rule is a logical outgrowth if affected parties should have anticipated that the relevant modification was possible. CSX Transp., Inc. v. Surface Transp. Bd., 584 F.3d 1076, 1080 (D.C. Cir. 2009). 3

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8 MEALEY S LITIGATION REPORT: EMPLOYMENT LAW edited by Bajeerah LaCava The Report is produced monthly by 1600 John F. Kennedy Blvd., Suite 1655, Philadelphia, PA 19103, USA Telephone: (215) MEALEYS ( ) mealeyinfo@lexisnexis.com Web site: ISSN