FLSA Proposed Exemption Changes Are Here: Learn How To Impact the Final Rule and How the Changes Impact You

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1 FLSA Proposed Exemption Changes Are Here: Learn How To Impact the Final Rule and How the Changes Impact You Squire Patton Boggs Webinar Series

2 Jill S. Kirila, Partner E: T:

3 Introduction Employers must pay employees at least the federal minimum wage (currently $7.25/hour) and overtime at a rate of at least 1.5 times the employee s regular rate for any hours worked over 40 in a week, unless exempt. The most common exemptions are the executive, administrative, professional, outside sales exemptions > white collar exemptions. 3

4 Introduction President Obama issued a directive to the Secretary of Labor last year to modernize and streamline the existing white collar exemptions. Regulations have not been updated since Proposed Rule finally issued last week 2 nd webinar in our series, will discuss: the proposed changes impacts and how you can impact the final rule 4

5 Current Rule - Recap Salary $455/week, $23,660/year Primary Duties Job duties must primarily involve executive, administrative, or professional duties Highly-compensated employee $100,000 total annual compensation plus one exempt duty 5

6 Proposed New Rule 1. Raises salary threshold $455/week-> ~$970/week Highly-compensated from $100,000 -> ~$130,000 Amounts to update annually 2. No changes to primary duty test YET Seeking comments on possible changes 3. Considering additional changes Nondiscretionary bonuses Adding more examples of exempt duties 6

7 Proposed New Rule - Salary Sets salary level at the 40 th percentile of all full-time salaried employees More than double current amount Based on BLS data Proposed Rule uses 2013 data $921/week, $47,892/year Latest available data is 1Q 2015 $951/week, $49,452/year DOL estimate (based on 2% growth) that numbers at time of final rule (2016) will be $970/week, $50,440/year 7

8 Proposed New Rule Salary DOL is inviting comments on: The proposed salary level, Any alternative level amounts or alternative methodologies for determining the salary level, and The effectiveness of the proposed salary level to: limit number of employees who pass the duties test but become nonexempt because of the increased salary level, and reduce number of employees who fail the duties test but are subject to a duties analysis and possible misclassification by their employers 8

9 Proposed New Rule Highly-compensated employees Proposes setting the annual compensation level equal to the 90 th percentile of earnings for full-time salaried workers Based on 2013 data, that would be $122,148/year ($130,364 based on Q data) More than 25% increase from current $100,000 9

10 Proposed New Rule Salary Updates Providing for salary level to automatically update For both executive, administrative, professional and computer employees AS WELL AS highly compensated employees Considering whether to update based on: Fixed percentile of earnings or Based on CPI-U Proposed rule provides for annual updating 10

11 Proposed New Rule Salary Updates DOL is seeking comments on: Methods of updating salary level (i.e., fixed percentile or CPI-U), When to schedule updates (effective date of Final Rule, January 1, other), and How often automatic updates should occur (annually proposed) 11

12 Proposed New Rule Duties Test DOL is considering revisions to the duties test Possible revisions include: Requiring exempt employees to spend a specific amount of time performing their primary duty (e.g., 50% primary duty requirement as under CA state law) Otherwise limiting the amount of nonexempt work an exempt employee may perform Reinstating long/short duties tests structure Adding to the regulations additional examples illustrating how the exemption may apply to particular occupations 12

13 Proposed New Rule Other changes? Other changes being considered: Whether to allow nondiscretionary bonuses to satisfy some portion of the standard test salary requirement (currently included in calculating total annual compensation under HCE test) Computer related occupations DOL is requesting suggestions from stakeholders on whether to include additional examples of the application of the exemptions to computer-related fields. 13

14 Impact of Proposed Changes DOL estimates direct costs to employers of around $250 million per year (more in year 1 for familiarization with new rules) as well as a transfer of income from employers to employees in the form of higher earnings, to the tune of ~$1.2 billion per year. DOL estimates that approximately 21.4 million currentlyexempt workers may be affected (i.e., may become nonexempt) 14

15 Impact of Proposed Changes How much? Year 1 Projected Employer Costs (in millions) Financial Impact EAP HCE Total Regulatory familiarization $ Adjustment $ $1.20 $ Managerial $ $2.10 $ Additional minimum wage payments $46.70 $0.00 $46.70 Additional overtime payments $1, $41.70 $1, Total costs $1, $45.00 $2,

16 Impact of Proposed Changes - Who? Workers working 40 hours/week or less = NO CHANGE Workers working more than 40 hours/week = OPTIONS Pay overtime premium based on current regular rate of pay Reduce regular rate of pay so that total earnings remain the same Eliminate overtime hours Increase salary to new proposed salary level Some combination of the above 16

17 Impact of Proposed Changes Affected workers (a) Regular hourly wages MW [b] Regular hourly wages < MW Hourly wages increase to MW Do not usually work OT Regularly work OT Do not work occasional OT Work occasional OT [c] Hourly wages adjust downward to offset some OT compensation dc] Weekly earnings increase to proposed salary level [e] Gain MW/OT protection Gain MW/OT protection Gain MW/OT protection Remain exempt No change in weekly earnings Weekly earnings increase on average Weekly earnings increase on average Weekly earnings increase on average No change in hours Hours decrease on average Hours decrease on average No change in hours [f] 17

18 Impact of Proposed Changes Where? Most likely to be affected: Industries manufacturing wholesale and retail trades, financial activities, professional and business services education and health services Occupations management business and financial, professional and related sales and related think low-level managers, clerks 18

19 Preparing For The Rule Changes Review and evaluate: current workforce classification 19

20 Preparing For The Rule Changes Assess potential impact of rule changes Increased direct payroll costs Increased administrative costs Need for reclassification? 20

21 Impacting the Final Rule 60-day public comment period. DOL drafts final regulation, taking into account public comments. DOL will hear testimony and may have another comment period regarding the proposed changes before issuing a final version to the Office of Information and Regulatory Affairs ("OIRA"). OIRA will then conduct a review of the proposed regulations and publish the final text of the regulation in the Federal Register. 21

22 Impacting the Final Rule Will hold another webinar to discuss comments we have received In the meantime, send us your comments Subject: FLSA Proposed Rules 22

23 FLSA Exemption Changes: The Proposed Rules Are Coming

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