New Proposed Increases to Minimum Salary Paid to Exempt Employees

By SHLC on July 2, 2015 in Legal Update
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On June 30, 2015, the U.S. Department of Labor (“DOL”) released a Notice of Proposed Rule for “defining and delimiting” the current exemptions under federal labor standards.  These exemptions are defined in the Fair Labor Standards Act (“FLSA”) and its corresponding DOL regulations, and provide that workers who meet certain criteria are deemed “exempt” from receiving “overtime pay at a rate of not less than one and one-half times the employee’s regular rate for hours worked over 40 in a workweek” under federal law. The thrust of the proposed rules is to increase the minimum yearly salary of those workers qualified as “exempt” under the FLSA from where it currently stands at $23,660, to the “40th percentile of weekly earnings for full-time salaried workers,” which based on current data from the Bureau of Labor Statistics would put the minimum yearly salary for exempt employees at $47,892.  The primary impact of the proposed changes on employers will likely be the increased amount that must be paid to exempt employees in order to preserve the exemption and the potential increase in overtime wages paid to employees who no longer meet the threshold for exempt status.

It is important to note federal labor regulations generally provide minimum standards.  This means that employers nationwide must pay at least the minimum federal standards, but individual states can require more.  At this time, these proposed changes are not law and so require no changes to current state laws.

The Reasons for this Proposed Change:

Under the current FLSA regime, certain employees are “exempt” when they meet the following criteria:

 – The employee is salaried (“salary basis test”)
 – The salary is at least $455 per week at $23,660 per year (“salary level test”)
 – The employee primarily performs executive, administrative, or professional duties, as provided in the Department’s regulations (“duties test”)

Given these criteria, an employer must determine the “primary duties” of the potentially exempt employee, whether those primary duties satisfy the test for either the executive, administrative, or professional exemption, and if so, whether the salary paid to such employee meets the salary basis and salary level tests. Such a process can be laborious for the employer and it can often be difficult to distinguish between exempt and nonexempt employees. Originally, when these criteria were adopted, $23,660 per year created a clear demarcation between the amount received by an employee who was exempt and one who was not. As time passed and minimum wage increased, $23,660 became less and less of a bright line for employers to use to distinguish exempt employees.  According to the DOL, by raising the minimum salary for exempt workers to $47,892, this bright line standard will once again be effective.

Two additional proposed changes should be noted.  First, in addition to increasing the minimum salary needed to take advantage of the professional, executive or administrative exemptions, these changes would also increase the minimum salary employers must pay to take advantage of the Highly Compensated Employees (“HCE”) overtime exemption. Currently, HCEs must receive at least $100,000 per year in total compensation, which includes certain types of bonuses, and must be paid at least $455 per month. Under the proposed changes, HCEs must be paid at least $122,148 per year in annual compensation to qualify for the exemption.  Second, similar to the HCE, employers could count non-discretionary bonuses as part of the overall minimum salary to be paid to professional, executive or administrative employees who otherwise qualify for the exemption.

You read the Department of Labor’s Fact Sheet here: http://www.dol.gov/whd/overtime/NPRM2015/factsheet.htm

Where Things Stand:

Currently, these proposed rules are just that, proposals for rules.  Therefore, these proposals do not reflect the current law nor do they necessarily reflect what the eventual law will be.  On July 06, 2015, the proposed rules will be published in the Federal Register and will be open for public comment until September 04, 2015.  After that time, unless the DOL re-opens the comment period, no more comments will be considered in the rule making process.

A Note to California Employers:

These proposed rules could significantly impact employers nationwide.  Employers might be required to pay a considerably higher salary to their exempt employees than they pay at this time if they wish to continue to take advantage of the overtime exemption.

Currently in California, an employee must receive no less than two times the state minimum wage for full-time work in order to be considered exempt as opposed to the one and a half times minimum wage required under federal law.  As it stands, California employers must pay their exempt employees a salary of at least $37,440, well over the current federal minimum salary of $23,660.  With the proposed increase, the minimum salary nationwide will rise to at least $47,892, and is projected to rise to $50,440 by the time the proposed rules are formally adopted and become the law (anticipated to be sometime in 2016).  Therefore, employers in California will be required to pay over $10,000 more per year to exempt employees in order for those employees to qualify as exempt.  Even with the proposed increase in California minimum wage from $10 per hour to $11 per hour in 2016, employers will still be short approximately $2,000 per year if they pay their exempt employees two times the state minimum wage.

A Note to Nevada  Employers:

Nevada employers will experience the same impact as California employers regarding the “salary level test.”  However, there are also discussions (not yet being proposed) for changes to the “duties test.”   Among the options being considered, there is discussion to change the federal standard in the “duties test” from requiring the employee to be “primarily” engaged in exempt activities, to the California standard requiring that the employee be engaged for at least 50 percent of the time in his or her primary, exempt duties.  This could significantly impact Nevada employers who currently determine exempt employees by whether they are “employed in a bona fide executive, administrative or professional capacity.” Thus, these proposed rules would require Nevada employers to go from a qualitative test in determining exempt employees (employed in a bona fide exempt activity) to a quantitative test (at least 50 percent of the time in exempt activities).

As things progress, we will update our blog to keep you informed on the new developments.