On March 7, 2019, the U.S. Department of Labor (DOL) announced a proposed rule that would make more than a million American workers potentially eligible for overtime. This eligibility would come about by changing the threshold for salaries that triggers the exemption from the overtime provisions of the Fair Labor Standards Act (FLSA).
Currently, the threshold amount is set at $455 a week (or $23,660 a year), set in 2004. Executive, administrative, and professional personnel (sometimes referred to as “white collar” employees) must make at least this amount to be exempt from overtime.
The proposed rule would change this threshold amount to $679 a week (or $35,308 a year). If the rule is adopted, any executive, administrative, or professional employees would have to be paid overtime if they work over 40 hours a week. That’s how more than a million American workers may become eligible for overtime.
Two Types of Employees Under the FLSA
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The proposed rule would also—
- Increase the total annual compensation requirement for highly compensated employees (HCEs) from the current level of $100,000 to $147,414 a year.
- Allow employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level.
History
On May 23, 2016, the Obama Administration issued a final rule increasing the threshold amount to $913 a week (or $47,476 a year), along with some other changes, including an automatic update of the threshold amount. The Obama Administration estimated that its rule would make more than 4 million people eligible for overtime. But the Obama Administration’s new rule was declared invalid by the U.S. District Court for the Eastern District of Texas. The district court’s decision was appealed to the U.S. Fifth Circuit Court of Appeals at the very end of President Obama’s term (October 30, 2017). The new Trump Administration asked the circuit court of appeals to hold its decision in abeyance until the new administration had time to consider the issue. That means that DOL is currently enforcing the regulations in effect on November 30, 2016, which set the threshold amount at $455 a week.
What the proposed rule does NOT do
The proposed rule does not—
- Affect the Federal (or Alabama) minimum wage.
- Make changes in overtime requirements for such local-government employees as police officers, fire fighters, and paramedics.
- Make changes in overtime requirements for such blue-collar employees as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, and production-line employees in manufacturing.
- Make any changes to the duties test.
- Require any automatic adjustment to the threshold amount (as the Obama Administrations rule did).
Automatic adjustments
The court decision declaring the Obama Administration’s new overtime rule invalid also declared the provision in that rule requiring an automatic update to the threshold amount invalid. The Trump Administration’s proposed rule does not have any requirement that for an automatic update. In addition, there will no regulatory requirement or legal requirement that DOL review the threshold amount on a regular basis. The FLSA only requires DOL to review the threshold from time to time. However, the Trump Administration has committed to reviewing the threshold amount every 4 years, although any change will go through the standard process in which a new rule is proposed, commented upon by the public, and eventually issued as a final rule—or not.
No change to the duties test
The proposed rule makes no change to the duties test for exemption from overtime. Since 1940, the DOL has applied three tests to determine whether an employee is exempt for the FLSA:
- Salary basis test: Is the employee paid a predetermined and fixed salary not subject to reduction because of variations in quality or quantity of work performed?
- Salary level test: Is the employee paid a minimum specified amount (the threshold amount set by Federal Government regulation)?
- Duties test: Do the employee’s job duties primarily involve executive, administrative or professional duties (as defined by Government regulation)?
To be exempt, the answer to all three questions must be “yes.”
Comment on the proposed rule
If you would like to comment on the rule, you will have until May 21, 2019, to submit your comments to the DOL.
More information about the proposed rule.
Next steps
Looking into my crystal ball, I predict the Trump Administration’s new overtime rule will go into effect sometime during 2019—if not at the end of the 60-day comment period. If the new rule goes into effect, employers will need to do one of the following for any currently exempt employee getting paid less than $679 a week:
- Pay that employee overtime for any hours over 40 worked during a week.
- Raise the salary of that employee to $679 a week.
So employers need to identify any currently exempt employees getting paid less than $679 so that they can begin to develop a strategy about what they want to do. As demonstrated by the next example, the strategy will depend on the amount of overtime that a currently exempt employee typically works.
Example
Let’s assume that the assistant manager for a fast-food restaurant currently gets paid $550 a week. Further assume that, under the current overtime rule, she is an exempt employee and typically works about 10 hours a week in overtime.
If the restaurant were to keep her salary at $550 a week and to begin paying overtime, her weekly pay would be approximately $756.30 ($550 + $206.30). The overtime amount is calculated by dividing $550 by 40 hours, which equals $13.75 (the assistant manager’s current hourly rate). The hourly rate for 10 overtime hours is $20.63 ($13.75 × 1.5), which results in overtime pay of $206.30.
In this case, you can see that—assuming that the assistant manager almost always works about 50 hours a week—increasing her salary to $679 a week would be less expensive than paying overtime. But if this employee typically works fewer than 6.25 hours a week in overtime, paying overtime would make more sense.
Needless to say, a series of complicated mathematical calculations will have to be made for every currently exempt employee making less than $679 a week. The result is based on the current salary being converted into an hourly rate and the amount of overtime worked.
And don’t forget that if you do decide to pay overtime to such employees, you will have to require them to start keeping a record of the time worked.
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.
© 2019