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February 15, 2016Client Alert

How to Prepare for the Upcoming Changes in Employee Classifications

In June 2015, the U.S. Department of Labor (DOL) released proposed rules that will significantly expand the number of employees who may be eligible for overtime under the Fair Labor Standards Act (FLSA). The DOL estimates that its proposed rules would cause approximately five million employees who currently are exempt to become “non-exempt” and, thus, entitled to overtime pay for all hours worked over 40 in a workweek.

The major changes the DOL envisions concern the amount of salary required for the executive, administrative and professional exemptions, and the total amount of annual pay required for the highly compensated employee exemption. The DOL proposed raising the minimum salary level for the executive, administrative and professional exemptions from its current level of $455 per week ($23,660 annualized) to approximately $921 per week ($47,892 annualized) in 2015 and $970 per week ($50,440 annualized) in 2016. The DOL proposed automatically updating this salary amount, so it will increase without additional rulemaking. 

The DOL also proposed raising the total annual compensation required to qualify for the highly-compensated employee exemption. The current annual compensation threshold is $100,000. The proposed rule would raise that amount to at least $122,148. Like the base salary requirement, the DOL also has proposed updating the total annual compensation amount so it will increase without additional rulemaking.

Even employees who meet the threshold salary to be classified as exempt under the executive, administrative and professional exemptions can be properly classified as exempt only if they also meet the duties tests for the specific exemption. Many expected the DOL to propose changes to the duties test applicable to the executive, administrative and professional exemptions. The DOL, however, did not propose specific changes to any of the duties tests, but instead solicited comments on them. The DOL’s solicitation of comments indicates that, at the very minimum, it is considering implementing changes to the duties tests. The DOL also solicited comments on whether employers should be permitted to pay nondiscretionary bonuses (such as some performance or profit-based bonuses). The DOL received over 250,000 comments during the 60-day comment period, which it will review prior to implementing the final rule.

While the proposed changes certainly are significant, they are not yet final and binding on employers. Indeed, due to the large number of comments, the DOL does not anticipate issuing its final rules until mid-to-late 2016. In the meantime, employers should revisit their exempt classifications to prepare for the upcoming changes. Employers should identify employees classified as exempt based on the executive, administrative, professional and highly-compensated exemptions with salaries near the proposed salary thresholds to determine how to classify the employees if the proposed rules become final. Employers should consider the DOL’s proposed automatic updates to the salary amounts when determining how to classify employees who receive salaries near the new thresholds. Employers also may want to perform an internal audit of their job titles and descriptions to ensure compliance with the DOL’s regulations. As part of this process, employers should develop an implementation plan for any change in classifications, including how to communicate changes to affected employees. By taking these proactive steps, employers can be well-positioned to comply with the DOL’s final rules to avoid potential liability and significant exposure.

For more information, please contact your Michael Best attorney; Daniel A. Kaufman at 312.836.5077 or dakaufman@michaelbest.com; Mitchell W. Quick at 414.225.2755 or mwquick@michaelbest.com; and Katherine L. Goyert at 312.596.5830 or klgoyert@michaelbest.com.

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