The much awaited revised new regulations governing who qualifies for the FLSA white collar exemption has finally been revealed by the Department of Labor. It did so on March 8 by publishing anNPRM(“Notice of Proposed Rule Making”). In December of 2016, a Texas federal court entered a nationwide injunction halting the implementation of new regulations which would have dramatically increased the salary threshold for exempting most white collar employees from overtime. Since then, the White House changed occupants and the Department has been deliberating on how to respond to the injunction. After considering responses to information requests from stakeholders on possible directions to take, and a round of “listening sessions” held across the country, the Department has finally spoken.

New Proposals and What Lies Ahead

The result: the Department is now proposing to…

• Increase the salary level requirement from its current $455 per week ($23,660 per year) to $679 per week ($35,308 per year);
• Allow 10 percent of the required threshold to include non-discretionary bonuses and commissions (i.e., $3,531 per year) which are paid at least annually, and allow a final “catch-up” payment to be made, if necessary, to make up for shortfalls to the 90 percent of the weekly minimum level paid over the course of a year;
• Increase the “highly compensated employee” alternative level and standard from $100,000 per year to $147,414 per year; and
• Establish a process under which it will consider the need and feasibility of making further salary level adjustments every four years.

The next step in this rulemaking process is a 60-day period (i.e., until May 7) for the public to submit comments about the proposed regulations. These comments may support the proposal or suggest refinements. After the comment period closes, the Department must consider all comments submitted and then issue a final rule. The Department anticipates that a final rule will go into effect by early 2020, hopefully giving employers enough lead time to adapt to the new requirements.

How We Got Here

This proposed rule, according to the Department, is designed to conform to the criticisms raised by a Texas court when it enjoined the changes set to go into effect in December 2016. Those regulations, among other things, would have doubled the current weekly salary level minimum requirement to $913 ($47,476 per year), which would have resulted in 4.2 million employees losing their exempt status. This outcome, the court held, would have effectively wiped out the duty tests and made one’s salary the primary factor in determining exempt status, an outcome not consistent with the express language of the FLSA. Under the proposed new $679 per week threshold, a threshold reached by applying the same principles which supported the 2004 increase to the current $455 per week level, the Department estimates that about 1.1 million employees will lose their exempt status solely due to this salary level adjustment. Consequently, the Department believes that the proposed new level is consistent with the FLSA’s framework. The Department is proposing to replace these regulations with those published in 2016, and thereby mooting the appeal of the Texas court’s injunction which has been pending, but stayed, before the Fifth Circuit Court of Appeals since December 2016.

The Legal and Political Landscape for the Proposed New Rule

Time will tell, but it’s clear the that Department hopes to have the new regulations in place before the coming election year. It also seems plausible that the Department abandoned some other contemplated modifications to the regulations to lessen their controversy and perhaps avoid further legal challenges. Among these tabled modifications were provisions to periodically adjust the salary level vis-à-vis some established indexing formula, provide different salary levels for specific sectors (e.g., small businesses, governments, educational institutions), and provide different salary levels for different regions (e.g., rural vs. urban regions).

Despite abandoning these types of refinements for at least the time being, the new rule—which is still subject to modification after the comment period—may still face legal challenges and perhaps congressional intervention. Some in the business community, for example, may still contend that the salary level at issue is too high or that the Department lacks the statutory authority to have any sort of controlling salary level test. Some may also contend that the Department was obligated to pursue implementing the enjoined 2016 regulations. There are many, though who, while agreeing that the salary level test has long been a key part of the exemption standard and therefore should remain, acknowledge that it was past due for an adjustment, but just not an adjustment as high as that adopted (but enjoined) in 2016. Thus, the ultimate issue is whether the Department has landed on a number that no one may really like, but is still palatable.

What Should Employers Do Now?

Under any of these scenarios, employers must now begin (or reactivate) reviews of their pay plans and determine the extent to which they may have to make adjustments once the anticipated new regulations are finalized and become effective. This is also a good time to do comprehensive FLSA compliance audits. Many have already done this in anticipation of the changes announced in 2016, but others held off on making adjustments at that time due to the injunction. Employers should not sit back and do nothing while waiting for how this round will conclude; planning must start soon to avoid being left with too little time to make adjustments to comply. Compliance options include: a) allowing some employees to lose their exempt status, pay them overtime if overtime is worked, and try to limit the amount of overtime they may work; and b) raising salaries (and perhaps adjust their pay structures) to protect the exempt status of employees, particularly those who regularly work more than 40 hours per workweek.

Significantly, some states already require or are primed to require higher salary levels for employees to be exempt under state law. Among the states with higher thresholds are California and New York; Pennsylvania and Washington are also considering similar major adjustments to their salary level tests. Obviously, employers in those states likely will not be dramatically impacted by the new proposed federal salary level. The fact that states do address these issues on their own may also support the view that major increases at the federal level are not necessary, but when the federal levels are not adequate for given region or market, enhancements via state law should come into play.

Employers with issues or concerns about the proposed regulations should take advantage of the comment period and submit comments to the Department. Dykema’s labor and employment attorneys can assist in that regard, as well as assist with audits and provide options for how to conform to the new regulations when they are finalized.