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CLIENT ALERT: Major Changes Proposed to Overtime Requirements Under the Fair Labor Standards Act

July 1, 2015

The United States Department of Labor (“DOL”), at the direction of President Obama, has announced a proposed rule that will greatly increase the number of employees eligible to receive overtime pay under the Fair Labor Standards Act (“FLSA”).  Once implemented, the revised regulations will more than double the salary level threshold that serves as part of the test for determining whether employees fall under overtime exemptions for executive, administrative and professional employees (collectively, the “White Collar Exemptions”).

Two tests are used to determine whether employees are exempt under one of the White Collar Exemptions.  The first test examines the specific and primary duties performed by the employee.  The second test, which is the focal point of the DOL’s proposed rule, requires that the employee be compensated at a rate of not less than $455 per week ($23,660 per year). 

The proposed rule requires that employees be compensated at a rate of at least $921 per week ($47,892 per year) in order to qualify for a White Collar Exemption.   The proposed rule also provides for automatic updates to the required salary in future years, although the DOL has not yet determined what formula to use.  Additionally, the DOL has invited public comment on whether non-discretionary bonuses or incentive payments to employees should be counted towards a portion of the salary level threshold.  Currently (and under the proposed rule), such bonuses may not be counted as part of the salary level test.

If the rule is adopted, an employee still would have to satisfy the duties tests under the one of the available White Collar Exemptions to be classified as an exempt employee who is not entitled to overtime.  The DOL is not proposing any specific revisions to the duties tests, but has welcomed public comments on whether the duties tests should be revised.  Similarly, the DOL has invited comment on whether regulations should be adopted to set forth the percentage of time an employee must spend doing exempt work in order to qualify for one of the White Collar Exemptions.

The DOL estimates that the increase in the salary level threshold will result in an additional five million employees becoming eligible for overtime under the FLSA.  The DOL further estimates that these changes will result in total costs of $240-250 million to employers.

It is important for employers to note that the revised salary level threshold has not yet been implemented.  Once the DOL’s proposed rule is published, there will be a 60-day period for the public to provide comments on the proposed rule.  The DOL will consider the public comments and, barring unforeseen circumstances, eventually will issue a Final Rule.  Ultimately, the Final Rule is expected to become effective 60 days after it is published in the Federal Register.

Potter Anderson & Corroon will continue to provide updates concerning these major changes to the FLSA as the administrative rulemaking process continues.