“White Collar” Workers Get a Raise: Changes to the Exemption under the FLSA
Arguably the most important law guaranteeing a worker’s right to fair pay is the federal Fair Labor Standards Act of 1938 (“FLSA”), which defines the forty hour workweek, sets the federal minimum wage, establishes requirements for overtime pay, establishes recordkeeping requirements for employers, and places restrictions on child labor. In addition, the FLSA requires employers to pay employees overtime (1 and ½ times their regular rate of pay) if they work over 40 hours in a single work week.
Employers often mistakenly believe that just because their employees are salaried, and not wage earners, then the employer is immune from paying overtime and those employees are automatically exempt from the FLSA overtime requirement. However, that’s not true. There are categories of employees who are exempt from receiving overtime pay, but that is dependent on the unique circumstances of the employment. For example, certain administrative, executive, professional and highly compensated employees may not be entitled to receive overtime pay—but even that might be changing soon.
On June 30, 2015, the United States Department of Labor (“DOL”) announced its proposed revisions to the overtime exemptions for “white collar” employees, i.e. those holding executive, administrative and professional jobs. The last time the FLSA was updated was in 2004, which established a salary threshold for the white collar exemption at $455/week ($23,660/year). The DOL’s new proposal doubles this salary threshold. Specifically, in order for an executive, administrative or professional employee to be exempt from overtime, at a bare minimum the employee must be salaried “at the 40th percentile of weekly earnings for full-time salaried workers ($921 per week, or $47,892 annually).”
Should this proposal be adopted, employees—white collar, blue collar or no collar—who earn less than $47,892 annually will be entitled to overtime pay no matter what. This is a significant upward departure from the current salary threshold, and is an additional hurdle to the other constituent tests employers must satisfy to demonstrate their employees are “bona fide” executive, administrative or professional employees. This means that even if an employee performs traditional “white collar” duties, the employee will be entitled to receive overtime pay if that employee earns less than this new, heightened salary minimum.
For example, under Section 13(a)(1) of the FLSA, as defined by its Regulations, 29 CFR Part 541, to qualify for the administrative employee exemption—in addition to the salary requirement—an employer must show that the employee primarily performs office work directly related to the management or business operations of the employer or the employer’s customers, and that “the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.” So, in addition to an employer proving that an employee is a bona fide administrative employee, the employer also must pay that employee at least $47,892 in annual salary to exempt the employee from receiving overtime pay.
Importantly, the DOL’s proposal also includes 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.” As a result, the DOL projects the new annual salary floor would increase to $50,440 in 2016.
Additionally, the DOL has proposed an increase to the total annual compensation requirement needed to exempt highly compensated employees “to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers,” which would be $122,148 annually if made effective immediately.
Employers should start planning for these new salary increases, as well as the resultant increases in the number of employees who will be entitled to receive overtime pay. With this new regulatory change on the horizon, employers should not delay in auditing their personnel by reviewing their current workforce composition and determining which employees classified as exempt will remain exempt—or become non-exempt—under these new regulations.
Furthermore, while many state wage and hour laws closely track or follow the FLSA, employers must remain mindful of the differences between the FLSA and their own state’s wage and hour regulations. For example, while the current requirements of Pennsylvania’s Minimum Wage Act, 35 P.S. § 333.101, et seq., and regulations at 34 Pa. Code § 231.1, et seq., and New Jersey’s Wage and Hour Law, N.J.S.A. 34:11-56a, et seq., are substantially similar to the current federal standards, employers must ensure compliance with both federal and applicable state wage and hour laws where there is any difference or deviation between the two.
Notably, the FLSA, 29 USCS § 218 (and its regulations at 29 C.F.R. Part 541.4) provides that federal law does not affect the enforcement of state overtime requirements. Employers should know that whichever law, state or federal, provides the greater benefit and protection to its employees will be the one enforced.
In conclusion, employers concerned about these anticipated changes to the framework of the FLSA would be wise to consult with their employment counsel to ensure compliance not only with these new federal regulations but, additionally, to review and ensure compliance with all applicable state laws.