USDOL Proposes To Increase Minimum Salary For Overtime Exemptions

On June 30, 2015, the U.S. Department of Labor (DOL) announced proposed rules which would more than double the current minimum salary required for the executive, administrative, and professional (EAP) exemptions to overtime. The proposal aims to plug a gap that some claim has caused many lower-level managers to be unfairly deprived of overtime when they work more than 40 hours. Skeptics say the new rule likely will decrease the number of hours many employees are allowed to work, replacing full-time workers with part-time workers, increase costs, and make it more difficult for hourly workers to climb the ladder to management positions.

The Proposed New Minimum Salary Level

Under the current regulations, to qualify for the exemption, an executive, administrative or professional employee must be paid the equivalent of at least $455 per week ($23,660/year on an annualized basis). DOL has long recognized the salary level test as being “the best single test” of exempt status. But inflation can erode the value of the salary level.

Under the proposed rules, DOL proposes to set the minimum salary level for the EAP exemption at a point equal to the 40th percentile of earnings for full-time salaried workers. DOL further proposes to include a mechanism that would automatically update the salary thresholds on an annual basis. The latest data currently available are for the first quarter of 2015 sets the 40th percentile of weekly earnings at $951, which translates into $49,452 for a full-year worker. Assuming two-percent growth between the first quarter of 2015 and the first quarter of 2016, DOL projects that the 40th percentile weekly wage in the final rule would likely be $970, or $50,440/year on an annualized basis.

Expected Impact on Employers and Employees

DOL estimates that 21.4 million workers are currently exempt EAP workers under existing rules. DOL projects that the proposed changes, if adopted, will result in approximately 5 million workers currently classified as overtime exempt becoming non-exempt.

It is expected that many employers will reclassify salaried workers paid less than the new minimum salary to hourly status, with hourly rates that approximate their former salaries. Also, many employers will try to control costs by restricting overtime. Thus, although some workers might receive a salary increase for employers to retain them in exempt status, a large number of workers are simply likely to lose their salaried exempt status, with no increase in pay. Furthermore, those employees who work overtime may experience a reduction in bonuses, because most bonuses must be factored into overtime computations. Thus, although the Obama administration is portraying the forthcoming rules as being a victory for workers, many workers are likely going to be no better off financially, and a not insignificant number may be worse off.

The final rules, once they are issued, will probably take effect sometime in 2016. Employers with salaried exempt employees should start planning for the new rules now.