Labor Department proposes changes to rules governing overtime

On July 6, 2015, the Federal Register published extremely significant proposed changes to the rules governing overtime under the Federal Fair Labor Standards Act (FLSA). This is the first step in the U.S. Department of Labor (DOL) changing the rules and is primarily directed toward decreasing the number of executive, administrative, and professional (EAP) employees who are exempt from the requirement that employers pay them time-and-a-half (1.5 times) their hourly rate for any time worked over 40 hours during a 7-day period. Put another way, this proposed change is likely to increase the number of people who get paid overtime by raising the threshold “salary basis” for those in traditionally white-collar positions.

Many people are aware that certain categories of employees—including for example, business executives—do not have to be paid overtime; that is, they are exempt from being paid overtime. Many also fall victim to the assumption that this exemption is available so long as the employees are paid a salary. Many times I’ve had clients call and disclaim any need to pay overtime because their employees are salaried.

In reality, being salaried is only a small part of the test for the EAP exemptions to most wage and hour laws. The other components are the amount of the salary and the duties of the position. In other words, not just any salary will do to render the employee exempt from overtime. The current rules set a bright line threshold by requiring all those who are classified as exempt to receive a minimum salary of at least $455 per week. See our earlier explanation of how a fast-food restaurant manager paid $454 would have to be paid overtime.

In addition, any EAP employees who are to be classified as exempt from overtime must meet the elaborate duties tests of the FLSA. These tests are a method of ensuring that the exempt worker is truly performing “exempt,” white-collar work. But the duties tests are inherently subjective and difficult to apply. Frustrated over the inconsistency in application and in response to the national trend of employers treating more and more blue-collar workers as “exempt,” the DOL has proposed increasing the threshold amount for triggering the exemption to overtime, indexing that amount for inflation, and a few other changes as well.

The Federal Register notice proposes six changes.

1. Increase the salary basis threshold to $921.

Since the Fair Labor Standards Act (FLSA) was passed in 1938, the threshold amount has been changed only seven times. In 1938, the threshold was $30 a week. Later increases came in 1940, 1949, 1958, 1963, 1970, 1975, and 2004. In 2004, the threshold amount was increased from $250 to the current $455.

The increase to $921 is based on surveys of actual wages paid and is set at the 40th percentile for all salaried employees (as opposed to hourly employees). This reflects the DOL’s long-held belief that salary level is the best single test for exempt status. The department hopes the new threshold will also decrease the amount of wage-and-hour litigation experienced over the last decade.

2. Retain special salary rates, but increase threshold amounts for those special cases.

This part of the proposed rule affects the citizens of American Somoa and certain employees working in the motion picture industry. These special cases have different threshold amounts than the standard threshold amount explained in change 1.

Instead of $921, the threshold amount for American Samoa will be set at $774 under the proposed rule. (The current threshold amount for American Samoa is lower than the mainland amount.)

Since 1953, there has been different threshold for the motion picture industry, in which an employee may work less than a full day, but be paid by the day. The current threshold is $695 a week; the proposed rule would increase the trigger amount to $1,404 a week, an increase of 102% (equal to the increase from $455 to $921 for the EAP employees).

3. Include nondiscretionary bonuses in the threshold amount.

All previous versions of the rules governing overtime have not considered the effect of paying bonuses. Business “stakeholders” have indicated that nondiscretionary bonuses and incentive payments are an important component of employee compensation in many industries. They assert that these bonuses and incentive payments encourage managers to “own” their business units. However, if the threshold is increased, there is the possibility that the amounts normally paid in bonuses or incentive payments may have to be shifted to “regular salary” to meet requirements for making the executive employee exempt from overtime payments.

The department is considering whether to permit nondiscretionary bonuses and incentive payments to count toward a portion of the standard salary level test for EAP exemptions.

If they are to count, the department is considering how to include nondiscretionary bonuses and incentive payments as part of the salary test. The department is leaning toward limiting the amount to 10% of the standard weekly salary level. Rather than a year-end catch-up payment, the department is leaning toward a requirement that the payments be made on a weekly or monthly basis.

4. Raise the threshold amount for highly compensated employees (HCEs).

Another element that complicates this issue is the rule about HCEs. The current HCE rule kicks in at $100,000, but employers are allowed to make a payment after the end of the current year to “catch up” an employee to qualify him or her for an exemption under the HCE rule. Just as other rules have not been adjusted for over 10 years, the threshold amount for HCEs likewise hasn’t been adjusted. So the department is proposing increasing the threshold for HCEs to $122,148. Only 10% (90th percentile) of the population makes more than this amount. The new amount is in line with the rationale used to set the $100,000 amount when it was adopted 10 years ago.

5. Automatically update the salary levels.

The department wants to make annual adjustments to all the rules previously discussed, rather than having go through the time-consuming process of rule making. The department is considering two approaches here: (1) tying the numbers to a percentile of earnings for full-time salaried employees or (2) tying the numbers to the consumer price index for urban consumers (CPI-U).

The current proposed rule change is based on using the percentile approach. For example, the revised threshold amount is based on the 40th percentile of salaried employees; the threshold for HCEs is based on 10th percentile of salaried employees.

What does this mean for employers?

1. Employers need to “stay tuned” for the latest developments. The rule is almost certain to be changed. We just aren’t certain what the numbers will be. But the new numbers are sure to induce a series of changes, require calculations, and have a ripple effect on the prices of services and products offered.
2. Employers who expect major ramifications from these proposed changes need to make sure they put in their “2 cents.” Even though these changes will not be made through a legislative process, the American public does have the right to participate in the decision-making process through commenting on the proposed rule changes.
3. Employers who use bonuses to encourage higher employee performance probably need to express their points of view—for they appear to be the most significantly affected by the proposed rule, at least from the point of view of making calculations and complying with more complex paperwork.
4. With this proposed rule, public comment may have a bigger effect than usual because the tenor of the DOL’s announcement is open-minded. In most cases, federal agencies tend to provide the wording for a proposed rule. For three of the five proposed changes, the DOL has not proposed wording for a rule, but rather solicited comments on generally described alternatives. For changes 1 and 2 (the threshold amounts for overtime), only the numbers in the rules will change, not the rules themselves.

Employers have about 1 week left to comment electronically on the proposed rule before the cut-off date of September 4, 2015. Comment on the proposed rule.

Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.

© 2016