Proposed Change to FLSA Regulations Would Make Exempt Status More Expensive

July 14, 2015

On July 6, 2015, the United States Department of Labor (DOL) published its highly-anticipated proposed rules that would require the payment of overtime to certain employees who currently have no entitlement to overtime.

Under the current Fair Labor Standards Act regulations, to be exempt from overtime pay, executive, professional and administrative employees must be paid a salary of at least $455 per week ($23,660 per year). Be reminded that simply paying employees by salary does not automatically exempt them from being entitled to receive overtime.

The DOL estimates that its proposed regulation would raise the salary requirement to $970 per week ($50,440 per year) in 2016. The net effect is that currently exempt employees who earn more than $23,600 but less than $50,440 would lose their overtime exemption and become entitled to overtime pay for all hours worked above 40 in a workweek.

In the coming months, the DOL will receive written comments from interested parties on the proposed regulation, meaning that there is currently no "effective date." In the meantime, employers should monitor these proposed changes and consider how, if implemented, they will impact current pay practices.

Some key points for employers to consider are:

  • The regulation would impact any employee earning between $23,660 and $50,440 annually who is currently correctly classified under the professional, administrative, or executive exemption.
  • These employees would no longer be exempt and will, therefore, be entitled to overtime for all hours worked over 40 in a particular workweek. (Overtime pay is one and one half times the regular hourly rate. Where a salary is paid, divide the salary by the number of hours it is intended to cover and multiply the result by 50%. This would be the amount due for each overtime hour).
  • Employers should assess the financial impact of raising a currently-exempt employee's salary above $50,440 versus paying them as an hourly, non-exempt employee that is entitled to overtime. Paying an employee above this amount would preserve the exemption, provided that the employee otherwise met the requirements of the particular exemption.
  • Before electing to increase a currently-exempt employee's pay to meet the new salary requirement, employers should first confirm that the employee meets all of the other exemption requirements. It does no good to increase an employee's pay if the employee is not properly classified as exempt in the first place. Legal guidance is recommended to ensure that your company is properly classifying employees. Misclassification errors will only become more costly if compensation is increased and overtime is owed.

If you have any questions or require assistance please contact Laurent S. Drogin or Richard L. Steer.

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Drogin, Laurent S. Partner and Chair of Labor and Employment Practice and Co-Chair of Restrictive Covenant Practice Partner and Chair of Labor and Employment Practice and Co-Chair of Restrictive Covenant Practice 212.216.8016 VCard
Feder, Hagit Senior Compliance Administrator, CFE Senior Compliance Administrator, CFE 212.216.1109 VCard
Kleinmann, David N. Partner and Co-Chair of Restrictive Covenant Practice Partner and Co-Chair of Restrictive Covenant Practice 212.216.1115 VCard
Steer, Richard L. Partner and Chair of Employment Practices Liability Insurance Practice Partner and Chair of Employment Practices Liability Insurance Practice 212.216.8070 VCard
Toevs Carolan, Tara Partner Partner 212.216.8007 VCard
Zagorsky, Arthur Partner Partner 212.216.8030 VCard

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