Changes Afoot for the White Collar Overtime Exemption

March 19, 2015

In March of last year, the Obama administration directed the Department of Labor to propose new rules that would make more workers eligible for overtime pay. The original target date was last November, but was postponed until February 2015 and now appears to be March or April. This is not a situation of infinite delay, and there is every reason to suspect that new proposed rules are imminent.

Let’s back up though. The Fair Labor Standards Act requires employers to pay one and a half times the regular rate of pay to hourly employees who work more than 40 hours per week and who have no vested interest in the success of the business. The latter is evaluated in two ways: how much the worker earns and whether the job requires an exercise of executive, administrative, or professional discretion.

What Employees Are Exempt?

The problem is that the exemption criteria do not deal adequately with the new, swampy middle of artificially inflated job titles – those who have no realistic prospect at climbing the economic ladder with more time at the fryer and a ServSafe certification, managerial title notwithstanding. Even they can easily be replaced in an afternoon.

A wide range of suggestions has emerged. Some involve changes to the overtime salary threshold. Others look at the nature of the duties performed. Whatever proposal emerges will be subject to a comment and review period that will probably move implementation into the late summer or fall at the earliest. The changes will surely affect low-wage managerial and other employees. Just as surely they will become an element that employers consider in defining job duties and crafting compensation structures.

Erosion by Inflation

The current federal salary threshold for determining which employees are exempt from the overtime provisions of the FLSA is $23,660, or $455 per week for a 40-hour week. This limit was last updated in 2004. Because of inflation, most salaried workers are now excluded from overtime eligibility. According to the Economic Policy Institute, only 11 percent now fall under this limit, compared with 65 percent in 1975.

This is below today’s poverty line for a worker supporting a family of four and is likely one of the causes of the chronically slow growth in the living standards of middle income employees.

Many argue that even this stark number does not capture the changing nature of employment, with the growth in temporary employment, part time work, two earner families, multiple jobs and the rise of independent contracting. These changes may give employers flexibility, but often make the employee’s situation more tenuous. For employees in this situation, changes in overtime rules miss the mark.

Some states, like California and New York, have tried to address this situation by raising the state threshold. In California the overtime laws cover employees who make less than $640 for a 40 hour week, rising to $800 in 2016.  In New York, the threshold is $600 per 40 hour week, rising to $675 in 2016.

What Should the Earnings Threshold Be?

The expectation among experts is that the DOL income threshold will come in at a number between $42,000 and $52,000 per year. The EPI estimates that the lower number would make an additional 3.5 million workers eligible for overtime while the higher one would bring an additional 6.1 million workers into the fold. Advocates for an increase, like the National Employment Law Project, estimate that a threshold of $51,168, or $984 a week would extend coverage to approximately 47 percent of salaried workers.

The Labor Department’s own chief economist has, in the past, advocated for a floor of $58,000, which would cover an estimated 54 percent of workers. Nick Hanauer, a progressive venture capitalist, has proposed a threshold of $69,000.

Even beyond arguments about the earnings threshold, commentators differ about how the increase should be implemented, including whether it should be phased in, as increases to the minimum wage have been in some states. The U.S. Chamber of Commerce, in its opposition to raising the compensation level, argues that the DOL should apply geographically specific thresholds.

Exempt Duties Issue

The other element in the existing standard for overtime eligibility concerns the nature of the duties performed. Changes proposed by the Obama administration could also alter the way in which the time spent in exempt activities is counted.

Rather than looking at the issue of whether an employee’s primary responsibilities are managerial, supervisory or administrative, the new guidance might require a tally of how time is actually spent. To be exempt from overtime protections, the employee would then have to spend at least 51 percent of his or her time performing exempt activities.

Approval Process

Any proposed changes to the overtime regulations are subject to the federal Administrative Procedure Act’s rulemaking process. The steps in this process, even at its fastest, can be quite time consuming and will include:

  • The issuance by the DOL of a notice of proposed rulemaking,
  • Followed by a public comment period and testimony, likely resulting in some revision of the proposed regulations,
  • After which the DOL will submit a final version of revised regulations to the Office of Management and Budget’s Office of Information and Regulatory Affairs,
  • OIRA will then conduct a final review, approve the text of the regulation and publish it in the Federal Register.

Even with a short comment period and a quick turnaround on a final rule, the DOL is unlikely to have any new regulation in place before the late summer 2015. The length of the process, however, does allow for input on the part of employers who fear the economic impact of a raised threshold and new standards for evaluating exempt duties. Affected parties are also likely to file legal challenges to any revisions, which could potentially delay their implementation further. It is an open question about whether new rules could be in place before a new administration rakes over.

Additional Effects on Employees

Although eligibility for overtime may boost employees’ wages, the reclassification of some workers as hourly rather than salaried may cost others some work schedule flexibility.  The extent to which this might have a detrimental effect on employees may depend on the particulars of income bracket.

Effect on Employers

If wage and hour regulations are updated, the implications could be significant for employers, but somewhat difficult to predict because of the range of possible situations and responses.

If employers find that certain positions no longer meet the standards set out in the white collar exemption, they will be required to either

  • readjust duties and compensations to re-qualify the employee or
  • reclassify the position as non-exempt, track hours and pay at time-and-half for hours above 40 in the workweek.

Others may respond with layoffs, reductions in hours, outside contracting or renewed interest in automation.

Penalties

The penalties for overtime violations can be daunting, If an employee sues for back overtime under the FLSA, penalties may include payment of back overtime or liquidated damages in an amount equal to the back overtime, and the employee’s attorney’s fees.

If the DOL brings an action, the employer may also be liable for a fine of $1,000 per violation. Since the DOL counts each paycheck that does not contain overtime as a violation, this can mean $1,000 per pay period. A willful violation can lead to a criminal penalty of $10,000 and up to six months in jail.

Both the DOL and state wage and hour agencies have been vigorously prosecuting class action claims, which easily can run into millions of dollars since they cover many employees and can go back for the prior three years.

Changes in the FLSA overtime rules will likely be proposed in the next month.  They are intended to make many more employees eligible for overtime pay and could have major consequences for employers.

Even before they are finalized, employers can take a proactive steps by reviewing job descriptions and classifications to make sure that they accurately reflect  the employee’s role in the business and duties performed. If nothing else, this will  protect the business from liability for overtime violations, and may make any revisions required by new regulations easier to accomplish.

What the regulations will look like after public comment and the litigation that is nearly certain to follow is hard to guess, but they will certainly improve the lot of at least some workers, possibly many more.

The larger economic effect is more difficult to assess because of range of possible responses on the part of employers. Like the impact of the Affordable Care Act, it may take several years for consequences to become clear because of the fundamental changes in the nature of employment.

Anne Wallace, Esq.

By

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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