Shannon DeNatale Boyd, Attorney
July 2015
On July 6, 2015, the Department of Labor (DOL) proposed to update the Fair Labor Standards Act (FLSA) regulations regarding the “white collar” overtime exemption. Historically, the FLSA white collar exemption has been largely irrelevant to most employers in California. California employees are entitled to select whichever law – federal or state – provides them with greater benefits. Under its corresponding executive, administrative, and professional exemption, California has traditionally offered greater employee benefits than federal law. The proposed FLSA rule, however, will offer greater employee benefits than California law. Thus, this new federal rule stands to become the new standard in California.
This exemption applies to executive, administrative, and professional employees, as well as employees working on outside sales and in certain areas of computer technology. The current federal overtime exemption for such employees applies to those who (1) meet tests related to their “primary job duties,” and (2) make a fixed salary of at least of $455 per week ($23,660 annually for a full-time worker) or $100,000 per year for highly-compensated executive employees.
This potential overhaul will increase the salary threshold that triggers the exemption for these workers. As proposed, the minimum salary requirement will be connected to the 40th percentile average weekly earnings for full-time salaried employees.[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][1] Based on 2013 data, this would amount to a minimum salary of $921 per week, or $47,892 annually–more than two times higher than the current minimum qualifying salary. By 2016, white collar workers will have to earn at least $970 per week ($50,440 per year) to qualify for the exemption. The annual compensation requirement for highly-compensated employees will be connected to the 90th percentile average weekly earnings, which would amount to $122,148 annually. The DOL (1) is also considering linking the salary threshold to the Consumer Price Index, and (2) is seeking public comment on possibly including nondiscretionary bonuses within the salary requirement.
The proposed rule does not yet establish a new standard for determining whether an employee meets the minimum tests relating to their primary job duties. Rather, the DOL is seeking public comment on a series of questions about the adequacy of the current duties test. California applies a different exemption test than federal law, focusing on the employee’s actual work rather than his/her job description. Thus, California employers need to be wary of how any changes in the federal law will affect their standard of classifying employees. Based on these comments, the DOL may also propose changes to the duties test.
The DOL estimates that its proposed regulations will cause 4.6 million currently exempt white collar employees to become eligible for overtime pay. Since these potential changes may result in costs of $240-$250 million to employers, the impact of these changes on employers is significant. The comment period on this proposed rule started on July 6th and ends on September 4, 2015, and the law is expected to go into effect next year. Comments can be submitted to www.regulations.gov.
Employers should consider preparing for these likely changes by identifying positions currently classified as exempt that might no longer be exempt due to the proposed new higher minimum salary threshold. For employees who may no longer qualify as exempt “white collar employees” under the proposed new DOL regulations, employers may be forced to choose between (1) limiting those employees’ hours to fewer than 40 per week, (2) paying those employees overtime, or (3) increasing their salaries to meet the new threshold. For white collar exempt employees who do make the new proposed minimum salary, employers may need to re-evaluate their primary duties as set forth in written job descriptions or contracts to ensure that those employees will still qualify as exempt.
Please contact any attorney in BFAS’ Employment Law Practice Group if you have questions or are interested in taking advantage of our employment law audit program to ensure your business is in compliance with the myriad workplace regulations and using current best practices.
Shannon DeNatale Boyd, Attorney
(Direct) 805.966.7599
© 2015 Buynak, Fauver, Archbald & Spray, LLP
DISCLAIMER: This Advisor is one of a series of business, real estate, employment and tax advisories prepared by the attorneys at Buynak, Fauver, Archbald & Spray, LLP. This Advisor is not exhaustive, nor is it legal advice. You should discuss your particular situation with us or with your own attorney. Our legal representation is only undertaken through a written engagement letter and not by the distribution of this Advisor.
[1] Under California law, the minimum monthly salary for most exempt employees is no less than two times the state minimum wage for full time employment. As of July 1, 2014, full time employees had to make $720 per week or $37,440 per year to qualify as an exempt employee. As of January 1, 2016, full time employees have to make $800 per week or $41,600 per year to qualify as an exempt employee. Thus, for the first time in many years, federal law will offer more benefits than California law.
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