USDOL’s Proposed Revisions to the Exemption Regulations Significantly Increase Salary Requirements, But Leave Duties Requirements Untouched
July 28, 2015proposed rule on the Fair Labor Standards Act white-collar overtime exemptions, along with a fact sheet summarizing the proposed rule. The good news for colleges and universities is that “teachers” will still not be subject to any salary level or salary basis requirements in order to qualify as exempt employees. The USDOL did not propose any changes to the teaching professional exemption, which applies to any employee who is engaged in the primary duty of “teaching, tutoring, instructing or lecturing in the activity of imparting knowledge” in an educational establishment by which the employee is employed, regardless of whether the employee is paid on a salary basis or at a minimum salary level. The bad news is that the proposed rule more than doubles the salary requirement to qualify for other executive, administrative, professional, and computer employee exemptions, from the current level of $455 per week to an amount that is expected to be $970 per week by the first quarter of 2016. Employees who perform “administrative functions directly related to academic instruction or training in an educational establishment” will continue to fall within the administrative exemption if they meet the new salary level requirement or if they are compensated on a salary basis at a level which is at least equal to the entrance salary for teachers in the educational establishment by which they are employed. It also significantly increases the salary threshold to qualify for the “highly compensated employee” exemption. The proposed rule also includes a procedure to automatically raise the minimum salary levels to qualify for the white-collar exemptions from year to year without further rulemaking. The USDOL estimates that nearly five million employees who are currently classified as exempt will immediately become eligible for overtime pay if the proposed rule is adopted as the final rule. USDOL also estimates that average annualized direct employer costs will total between $239.6 and $255.3 million per year, depending on the updating methodology although certain transition strategies may help control and/or alleviate these costs. The USDOL is proposing to set the salary requirement to qualify for the executive, administrative, professional, and computer employee exemptions at the salary level equal to the 40th percentile of earnings for full-time salaried workers, and the salary requirement to qualify for the highly compensated employee exemption at the salary level equal to the 90th percentile of earnings for full-time salaried workers. The USDOL used data compiled by the Bureau of Labor Statistics from 2013 in drafting the proposed rule, which provides for a minimum salary level of $921 per week to qualify for the executive, administrative, professional, and computer employee exemptions, and a minimum salary level of $122,148 per year to qualify for the highly compensated employee exemption. However, the USDOL stated in its Notice of Proposed Rulemaking that it will likely rely on data from the first quarter of 2016 if the proposed rule is adopted, which will result in a projected minimum salary level of $970 per week to qualify for the executive, administrative, professional, and computer employee exemptions. There was some speculation that the duties requirements would also be revised to make the exemptions more restrictive, but the USDOL’s proposed rule does not include any revisions to the duties requirements to qualify for any of the white-collar exemptions. However, the USDOL stated in its Notice of Proposed Rulemaking that it is nevertheless seeking comments on whether the duties tests are working as intended to screen out employees who are not bona fide executive, administrative, or professional employees. So, there is still a possibility that the duties requirements could be revised based on comments received by the USDOL about the proposed rule. Notwithstanding that the proposed salary level changes do not impact teachers, colleges and universities, like most other employers, undoubtedly have a number of non-teaching positions currently classified as exempt which fall between the current $455 per week salary level and the proposed $970 per week salary level that they should immediately begin assessing. Certainly one purpose behind this review should be to determine whether to raise the salary level of some of these positions should the regulations become finalized, in order to keep the exemption. In some cases, an institution may determine that the increase to $970, especially when coupled with little or no “overtime” work for the position, is such that it makes more sense to simply convert those positions to hourly. The proposed rule should also serve as impetus for institutions to review their exempt classifications generally, to make sure that they are comfortable with their assessment of where these positions stand in light of the duties test. Application of the FLSA’s exemption is often a complicated and very fact specific analysis, which isn’t always repeated as jobs change over time. As a result, it is not uncommon for all employers to have at least some misclassified positions. Now would be a good time for institutions to look at all of their exempt positions from both a duties and salary perspective.