USDOL Proposes Changes to Federal Overtime Exceptions

On March 13, 2014 President Obama directed the Secretary of the U.S. Department of Labor (“USDOL”) “to begin the process of strengthening overtime pay protections for millions of workers to help make sure they are paid a fair wage for a hard day’s work while simplifying the rules for employers and workers alike”. That was shortly after the President issued an Executive Order (February 2014) raising the minimum wage to $10.10 per hour for employees of federal contractors working at federal facilities. Both Executive Orders lacked some specifics and left many employers wondering about the details and the impact of the proposed changes.

On June 30, 2015, the USDOL published its long-awaited update to the Fair Labor Standards Act’s overtime exemptions (“Proposed Changes”). The Proposed Changes included a 60 day notice and comment period. The notice and comment period ended Friday, September 4, 2015. During that period the USDOL received an estimated 220,000 comments on the Proposed Changes. Final regulations are expected to take effect in spring 2016 but there are still many unanswered questions. The Proposed Changes are expected to make approximately 5 million additional workers eligible for overtime but some commentators suggest more than 11 million employees will be impacted by these changes.

Minimum Salary Exemption

Current regulation:

Under current FLSA overtime exemptions known as the “white collar exemptions” (last updated in August 2004), an employee is exempt from overtime if the employee:

  1. Is paid on a salary basis; 1
  2. That salary is at least $455 per week (or $23,600 per year), and
  3. The employee’s duties meet the duties test of each exception test (e.g. Executive, Administrative and Professional employee tests).

The Proposed Changes drastically changed the salary component to these tests.

New salary threshold:

The Proposed Changes increased the salary required for exemption to $970 per week (or $50,440 per year). That is more than double the threshold established in 2004. That salary increase was reportedly intended to cover 40th percentile of workers (in 2004 changes to salary threshold covered 20th percentile).

Annual automatic adjustment:

Under the Proposed Changes the salary threshold will adjust annually based on either a “fixed percentile” or a “CPI-U” approach. Under the fixed percentile approach the USDOL will evaluate what specific salary level is equivalent to the 40th percentile of full-time salaried workers. Under the CPI-U approach the USDOL will adjust the salary level annually based on changes in the consumer price index for all urban consumers.

The USDOL has not decided which approach it will employ but believes that either approach would produce similar results.

Criticisms of Proposed Changes to Salary Threshold:

Many HR professionals and business owners have voiced their concerns about the Proposed Changes. Those criticisms and concerns include:

  • It will force employers to reclassify workers to non-exempt status.
  • Some employees may realize a slight increase in pay but others may have their hours reduced.
  • Changes could adversely affect employers in rural areas and/or small businesses as there was no regional adjustment as had been used in the past.
  • May limit employer discretion in awarding merit increases.
  • Uncertainty of impact on nondiscretionary bonuses on salary requirement.
  • Automatic increases could disrupt employer planning and budgets.
  • May inhibit employees from acquiring the training and experience needed to advance their careers.
  • May adversely affect the not-for-profit sector (where average salaries tend to be lower) than the private and public sectors.
  • Workplace flexibility will likely decrease as formerly exempt employees will be bound to a time clock.
  • Retail and not-for-profit organizations to be hit hardest (e.g. Assistant Managers).
  • And many are concerned that public comments might generate even more changes, especially to the duties test component of the exceptions.

Not Everyone is Upset:

Many labor groups praise the Proposed Changes for rectifying the erosion of overtime rights over the last 40 years and for working toward restoring the middle class. Also the Bureau of Labor Statistics reported that the current salary level for FLSA overtime exemptions is below poverty level (for a family of four).

More Changes May be Coming

The USDOL did not make any substantive changes to the exceptions duties test. Rather, it solicited comments on what proposed changes should be. In 2004, the last time these exceptions were updated, USDOL used the public comments to make the duties test even more difficult to satisfy. That was especially true for the Administrative exception.

Even if USDOL proposes changes to the duties test, do not expect those changes to be immediately effective. That is because the federal Administrative Procedures Act (APA) requires all rules to pass through notice and comment period. The USDOL’s request for comments would satisfy only the comments portion of that requirement. If the USDOL does propose a change to the duties test, expect advocacy groups to challenge and seek to nullify the changes. In the meantime, the salary threshold could still increase as proposed.

Finally, USDOL hasn’t indicated yet whether it would adopt a test similar to California, which evaluates an employee’s primary duty based on quantitative (e.g. 50% or 80%), as opposed to, qualitative metrics. This too could create classification problems for employers trying to comply with the new standards.

Highly Compensated Employees

The USDOL also changed the threshold for highly compensated employees from $100,000 per year to $122,148. Unlike the minimum salary level test, the proposed threshold for highly compensated employees tracks the methodology used in 2004. Like the minimum salary level test, the threshold for highly compensated employees will be adjusted annually.

Immediate Actions

Employers may experience difficulty planning for the final regulations. Right now, the duties test remains a looming unknown. The salary threshold could be effective by March 2016, perhaps sooner. If the USDOL adopts quantitative rather than qualitative metrics, employees may need to re-evaluate an even larger universe of positions.

There is also the possibility that any change to the duties test will be overturned for violating the APA. Thus, even if an employer can make necessary changes regarding the minimum salary test, these changes may be frustrated by whatever changes befall the duties test.

What Should We Do Now?

It is recommended that all covered employers (meaning just about every employer) review existing OT exemptions to make sure they meet current tests (salary and duties test). They should then review existing OT exceptions to determine which will fall short of the Proposed Changes and the estimated cost of overtime if those nonexempt employees work over the threshold hours.

Stay tuned!