Federal Government Proposes Changes to Overtime Rules by Jason R. Mau

20-Aug-2015

President Obama recently directed the Department of Labor (“DOL”) to update the regulations pertaining to the minimum wage and overtime exemptions under the Fair Labor Standards Act (“FLSA”). The DOL announced the proposed changes on June 30, 2015, and officially published them on July 6, 2015, allowing for a 60-day comment period through September 4, 2015.  Basically, the proposed changes would change the salary exemption threshold.  According to the DOL, if adopted, five million additional workers would become eligible for overtime pay under the FLSA. 

The Proposed Changes

The FLSA requires employers to pay at least the federal minimum wage for all hours worked, and time and one-half of the regular pay for all hours worked over 40 hours in a workweek.  The FLSA also includes exemptions to the minimum wage and overtime laws for white-collar workers.  Currently, the exemptions require that an employee receive, at a minimum, a $455 weekly salary (or $23,600 annually) and that the employee’s job duties fall under one of the specific job classes.  These different classes are executive, administrative, professional, highly compensated, outside sales, and certain computer employees.  The highly compensated class of exempt employees is also required to receive at least $100,000 in total annual compensation.  These exemption regulations were last updated in 2004.

The proposed changes raise the weekly salary threshold from $455 to what is expected to be $970 if adopted for 2016.  The annual threshold is similarly estimated to rise from $23,600 to $50,440.  These numbers represent the DOL’s attempt to set the threshold at the 40 percentile of weekly earnings for full-time salaried workers.  Additionally, for the highly compensated class of exempt workers, the annual compensation threshold rises from $100,000 to $122,148 (estimated for 2016).  This would place the highly compensated employee compensation level equal to the 90 percentile of earnings among full-time salaried employees.

In addition, the proposed rule changes provide a mechanism for the threshold levels to be automatically updated moving forward.  These updates will be based either on average earnings for salaried workers or on the Consumer Price Index.

Additional Comments Sought

As part of the federal requirements for all regulation revisions, these proposed changes are subject to a public comment collection period.   In addition to soliciting comments related to the proposed changes, the DOL has specifically asked for comments on related subjects not included in the proposals.  Many of these additional comments sought are related to the “duties tests” used to determine exempt status.  Since an employee’s job title or job description will not automatically determine exempt status, courts have developed “duties tests” based on the DOL regulations to determine whether a specific employee is exempt.  These tests examine job duties to determine whether an employee is actually performing at least some work that can be characterized as exempt work under the specific exemption job classes. 

 

The DOL has asked the public to comment on whether these tests are adequately screening out those employees that are not truly white-collar employees.  The comments sought ask what changes, if any, should be made to the “duties tests” and whether an exempt employee should be required to spend a minimum amount of time performing exempt work as his primary duty.  The DOL specifically asks whether it should adopt standards that would require an employee to perform at least half of his time on work that is exclusively part of his primary exempt duty.  Furthermore, if 50% is not considered an indicator of current workplace realities, the DOL asks whether there is a more appropriate threshold percentage. 

Similarly, the DOL is requesting comments related more specifically to “duties tests” applicable to the executive exemption.  Comments are being sought to help the DOL determine whether it should continue to allow otherwise exempt executives to perform exempt and nonexempt work concurrently.  In addition, the DOL has asked for comments related to whether it should allow nondiscretionary bonuses, such as bonuses tied to productivity or profitability, to be considered as part of the salary test requirement.  Further, the DOL has asked whether it should reconsider its previous decision in 2004 to eliminate the previous long and short duties test structure.  Finally, the DOL is soliciting suggestions for additional white-collar occupation titles or categories (especially computer related) to include as exempt professionals.

DOL Analysis

As part of the basis set forth for the proposed changes, the DOL has framed the changes as properly rewarding hard work.  Many of the examples given relate to retail store managers or assistant managers, suggesting that many of these positions are not providing the necessary compensation to properly support a family.  According to the DOL, the rules related to the thresholds have not kept up with the cost of living, and is lower than the poverty threshold for a family of four.  The current classifications of exemptions have expanded to the point that it is estimated that only 8% of full-time salaried employees are eligible for overtime pay.  In 1975, the percentage of full-time salaried employees eligible for overtime pay was 62%.  The proposed rules were developed to raise the threshold, provide clarity as more employees would be entitled to overtime, prevent a similar erosion of future overtime, and provide greater predictability by the annual automatic threshold updates.  

Initial Reactions 

The proposed rule changes would apply equally to all types of employers – governmental, private, industrial, retail, etc.  One of the concerns most frequently expressed across the board in response to the notice of proposed changes was the large increase in the salary thresholds.  Some have pointed out that during the time period since the last change to the exemption rules, inflation has only increased by about 25%, while the changes intend to more than double the hourly threshold.  Studies suggest that the increased threshold could cost businesses $9.5 billion in overtime costs if no significant adjustments are made by employers.

 

Overall, the increased threshold obviously affects some employers more than others.  Since the threshold changes are based on the national data of full-time salaried employees across all sectors, some smaller businesses and non-profits will be affected more than larger employers.  Some business groups have gone as far as suggesting that the proposed changes would incentivize businesses to lay off higher-paid executives and replace them with lower-paid workers.  Other national groups suggest the changes will effectively eliminate middle class management positions.  However, many experts believe that the proposed regulations are more in line with the original intent of the FLSA to end what President Roosevelt called “starvation wages and intolerable hours” in 1938.

Employer Application

Regardless of the size of each employer, there are some basic points and applications that should be considered in anticipation that the proposed rule changes could come into effect as early as 2016.  While the proposed rules are still in the comment process, employers can look to join with similarly-situated employers to submit comments or check with related associations to determine whether they are considering submitting comments on behalf of their members.  Employers should also take advantage of this comment period to review job duties and salary levels, determine which of their employees are likely to be considered nonexempt should the proposed regulations be adopted, and plan accordingly.  Employers may need to find a balance between raising salaries for currently exempt employees and converting other currently-exempt employees to non-exempt status and paying overtime. 

Finally, it should be remembered that regardless of which changes are adopted, the employers’ control over overtime is unchanged.  Employers can effectively limit the ultimate impact of the new proposals by limiting the number of overtime hours worked by employees.  However, shifting employees from salary to hourly or exempt to nonexempt will present a range of operational and legal implications for employers, not to mention possible morale or production issues.  Accordingly, having a plan to manage employees and working with local counsel could help limit the overall impact.