AAC F A M I L Y & F R I E N D S
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Background Since 1940, there has been a so-called “white collar” exemp- tion to the normal rule that workers must be paid overtime at the rate of one and one-half times their regular rate when they work more than 40 hours in a week. In general, three tests must be met for the exemption to apply: (1) the employee must be paid a predetermined, fixed salary that is not subject to reduction because of variations in the qual- ity or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet or exceed a specified minimum (the “salary level test”); and (3) the employee’s job duties must primarily involve execu-
tive, administrative, or professional (EAP) duties as defined by the regulations (the “duties test”). DOL has proposed to change the salary level requirements substantially — in effect, almost doubling the amount an employee must be paid to satisfy the current “salary level” test. Salary levels have been changed seven times since 1938, most re- cently in 2004 when the Department of Labor’s Wage and Hour Division (WHD) undertook a wholesale revision of Part 541 of the regulations, but this is the biggest single jump yet.
New Rule Under the current regulations, to qualify for the exemption
an executive, administrative, or professional (EAP) employee must be paid on a salary basis and meet the duties test, and be paid at least $455 per week ($23,660 per year for a full-year worker). Te anticipated regulations will set the initial, stan- dard salary level for the EAP exemption at a point equal to the 40th percentile of earnings for full-time salaried workers. Based on the latest statistics available, DOL projects that for 2016, the 40th percentile weekly wage in the final rule will be $970 per week, or $50,440 per year for a full-time worker. In other words, unless an employee is earning more than $50,440 per year, he or she must be treated as an hourly worker and must be paid overtime. (To qualify for a different exemption for highly compensated employees (HCE), an employee will have to earn at least $122,148 per year.) To prevent the salary levels from becoming outdated, WHD
proposes to include in the regulations a mechanism to auto- matically update the salary and compensation thresholds on an annual basis using either a fixed percentile of wages or the consumer price index for urban consumers (CPI-U). Depend- ing on the nation’s economic performance, this could result in automatic annual pay increases for exempt employees.
Impact on Employers Raising the minimum salary levels for exempt employees will substantially reduce the number of workers for whom employ- ers must apply the duties test to determine exempt status: no one earning less than the minimum salary level will qualify. Similarly, setting the HCE total annual compensation level at the annualized value of the 90th percentile of weekly wages of all full-time salaried employees ($122,148 per year, based on 2015 statistics) will ensure that the HCE exemption cover only the top 10 percent of earners, employees who almost invariably meet all the other requirements for exemption. Finally, auto- matic annual updates to the standard salary and compensation are designed to ensure that they maintain their effectiveness.
COUNTY LINES, SPRING 2016
Methodology DOL arrived at their estimate for the threshold earnings level
by including broad categories of employees, many with high earnings, who are fully exempt from the overtime rules. Te proposed rule uses data including employees previously exclud- ed by the Department in 2004. For example, teachers, physi- cians, lawyers, outside sales employees, and federal employees were excluded from the 2004 sample because they are not subject to the part 541 salary level test. Te proposed revision included them, and netted many very high earners. According to the Bureau of Labor Statistics (BLS), in 2012 physicians and surgeons averaged more than $187,000 in annual earnings; the Office of Personnel Management stated that the average earnings for federal employees in 2012 were over $78,000. Tis makes comparing the 2004 study with the current proposal more difficult. In a rare fit of transparency, DOL admits that its basis for these calculations is not totally ... transparent: “Te Department notes that the public will not be able to exactly rep- licate the weekly earnings and percentiles used in this NPRM from the public-use data files made available by BLS. As with all BLS data, to ensure the confidentiality of survey respondents, data in the public-use files use adjusted weights and therefore minor discrepancies between internal BLS files and public use files exist. BLS publishes quarterly the earnings deciles of full-time salaried workers on which the Department relies to set the proposed salary level at
http://www.bls.gov/cps/research_se- ries_earnings_nonhourly_workers.htm.”
Nondiscretionary Bonuses in the Salary Level Requirement Until now, WHD looked only at actual salary or fee payments made to employees and, with the exception of the highly com- pensated test, did not include bonus payments of any kind in this calculation. However, several business representatives asked then to include nondiscretionary bonuses and incentive pay- ments as a component of any revised salary level requirement. Such payments are an important component of employee compensation in many industries, and might be curtailed if the standard salary level was increased and employers had to shift compensation from bonuses to salary to satisfy the new standard salary level. Te proposed rules provide that in order for an em- ployer to be permitted to credit such compensation toward the weekly salary requirement, the employee will have to receive the bonus payments monthly or more frequently. (WHD was not willing to consider allowing employers to make a yearly catch- up payment as they may under the HCE exemption.)
Annual Adjustments (Indexing) In a bid to avoid inflation-driven “bracket creep,” WHD
proposes to establish a mechanism for automatic updates for the standard salary test, as well as the total annual compensa- tion requirement for highly compensated employees. (Tis is an idea that has been considered for the minimum wage, although never formally proposed.) Te Department is considering two alternate methodologies for annually updating the salary and compensation thresholds. One method would be based on a fixed percentile of earnings for full-time salaried workers. Te
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