HR Compliance

Changes Coming to Definition of Exempt Employees

By

Robert Barclay

| Jul 9, 2015

Millions of Americans could become eligible for overtime pay in the coming months.

Back in March 2014, President Barack Obama issued a proposal to the U.S. Department of Labor (DOL) to expand eligibility requirements for overtime workers under the Fair Labor Standards Act (FLSA). In response, on June 30 of this year, the DOL issued proposed regulations to do just that.

The proposal would guarantee time-and-a-half pay for salaried employees who earn $50,440 or less per year. This is a dramatic increase from the current threshold, which has been sitting at $23,660 per year since 2004. Additionally, the proposed regulations would raise the salary level for an exempt, highly compensated employee from $100,000 to $122,148.

According to Secretary of Labor Thomas Perez, these changes could put an additional $1.3 billion in overtime pay in workers’ pockets.

Background

In 1940, the DOL issued regulations that included three tests to define whether an employee could be exempt from the overtime provisions of the FLSA:

  1. Salary basis test – meaning an employee must be paid at a level that could not fluctuate based on the quality or quantity of the labor performed.
  2. Salary level test – the salary must meet a specified minimum amount; this is the part that is changing with the proposed regulations.
  3. Duties test – the employee’s job duties primarily must involve executive, administrative or professional duties, as defined within the regulations.

Concurrent with the 1940 regulations, the DOL established the minimum salary requirement for the salary level test to be $30 per week for executives and administrative employees, and $50 per week for professional employees. The DOL has updated these minimum salary thresholds in 1949, 1958, 1963, 1970, 1975 and, most recently, 2004.

The 2004 level was set at a uniform rate of $455 per week or $23,660 per year for all exempt employees, and these values have not changed since 2004.

Thus, any employee meeting these three tests above – and, therefore, earning $23,660 per year – can be considered exempt from the current overtime requirements of the FLSA.

What’s Next?

Currently, the DOL is accepting comments on the proposed regulations through Sept. 4. According to the DOL, the final regulations could be published as early as the start of 2016, but some observers believe the release could be pushed to March or April. While the DOL could change the actual amounts of the final increases from the proposed values, it is almost a certainty that the thresholds will increase significantly, meaning employers will need to be prepared for the changes once they are finalized.

About the Author

Robert Barclay

Robert Barclay has been the Tax Research Team Lead at Paycom since 2012, and has been instrumental in such company projects as the development of its Affordable Care Act compliance product, implementation of geolocation services and redesign of Form W-2. He joined Paycom in 2011, bringing more than 20 years of experience with the capital markets consulting practices of Ernst & Young in Memphis, Tenn., and Birmingham, Ala.; and Causey Demgen & Moore in Denver, Colo. A native Oklahoman, Barclay is a graduate of Rhodes College in Memphis, where he played football as linebacker.

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