The U.S. Department of Labor recently announced a proposed rule that would change the minimum salary threshold for exemption for the so-called “white collar” exemptions – the administrative, executive, and professional exemptions.

The federal Fair Labor Standards Act (“FLSA”) requires that employees receive minimum wage and overtime (calculated at one-and-a-half times the regular rate of pay for hours over 40) unless they are “exempt” from one or both requirements. The most popular exemptions are the so-called “white collar exemptions,” which apply to executive, administrative, and professional employees who meet rigorous criteria based on their duties. To be exempt, these employees must be paid a salary of at least $455 per week and the employer must pay on a salary basis (meaning no docking for partial workweeks, subject to limited exceptions). Doctors, lawyers, and teachers can be exempt under the FLSA even if they are not paid on a salary basis and there is no minimum salary for these employees. (The computer professional exemption has special rules under which employees can be paid hourly, but in any event, there is no computer professional exemption under Connecticut state law.)

The proposed rule would increase the salary threshold from $455 per week ($23,660 annually) to $679 per week ($35,308 annually). Nondiscretionary bonuses and incentive payments (including commissions) may account for up to 10 percent of the minimum salary level under the proposed rule, while discretionary bonuses would not count toward the minimum salary level.  The duties tests are not changing under this rule. The threshold for the “highly compensated employee” exemption increases from $100,000 to $147,414, but Connecticut does not recognize this exemption, so employers should not rely upon it for employees in the state.

Raising the salary threshold is expected to transform many exempt employees into non-exempt employees overnight. Some employers will be able to weather this change better than others. Virtually every employer in the country is subject to the FLSA, even if there is only one employee. This includes non-profits and public sector employers. In Connecticut, where the cost of living is high, the effect of this change may be lower than elsewhere in the country. It is more likely here than elsewhere that employees who meet the duties tests are already earning at least $679 per week. However, non-profit, low-profit, and government employers may find that many of their employees are subject to this rule change and these employers may have more rigid budgets that cannot withstand the impact. Employers with an annual volume of sales or business of less than $500,000 may wish to consult an employment lawyer to see if they are one of the very few employers not subject to the FLSA.

Assuming the rule is ultimately promulgated, employers will need to either raise salaries of affected employees to ensure they meet the threshold or begin treating these employees as non-exempt. Raising salaries is straightforward, but remember that the rule is likely to require periodic increases, so the amount will change going forward. If employers do not wish to raise salaries, the employees must be treated as non-exempt. This means that employers must keep records of their hours worked and they must be paid overtime for hours over 40. It is legally permissible to cap hours at 40 by prohibiting employees from working overtime and some employers may choose to hire multiple employees to do what was once one employee’s job. Collective bargaining agreements may limit employers’ options.

Employers with exempt employees earning less than $679 per week should consider their budgets and operational practices to determine how they wish to comply with the rule if and when it goes into effect.  The last time the Department of Labor promulgated a rule on this subject, it was halted by a court decision, so employers should be prepared for a great deal of uncertainty regarding whether and when this proposed rule would go into effect.  Nonetheless, it is a change that may require significant advance planning, so it is a good idea for employers to examine their payrolls now.

Our team of labor and employment attorneys can assist employers in adjusting to the new white-collar exemption requirements and ensuring compliance with all applicable labor and employment laws.  Contact us to arrange a wage-and-hour self-audit for your organization.