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Employers face prospect of paying more overtime under Obama directive

March 25th, 2014  |  Lisa Milam-Perez

By Lisa Milam-Perez, J.D.

Earlier this month, President Obama issued an Executive Memorandum directing the Secretary of Labor to amend the Fair Labor Standards Act (FLSA) regulations regarding overtime pay — in particular, the “white-collar” exemption provisions that outline which employees are not entitled to such pay. In the President’s view, these exemptions reach too broadly, and more American workers should be entitled to compensation for the excess time they put in over the standard 40-hour workweek. “Today, only 12 percent of salaried workers fall below the threshold that would guarantee them overtime and minimum wage protections (compared with 18 percent in 2004 and 65 percent in 1975),” notes a White House fact sheet on the initiative. “Many of the remaining 88 percent of salaried workers are ineligible for these protections because they fall within the white collar exemptions.”

FLSA Section 201 requires covered employees to be compensated at a rate of 1.5 times their regular hourly rate for hours worked above 40 in a week. However, “executive,” “administrative,” and “professional” employees are exempt from this requirement, as are “computer professionals,” pursuant to the statute’s enabling regulations (29 C.F.R. Part 541), first issued long ago. These rules identifying which employees are “exempt” and “nonexempt” were most recently updated in 2004, under the Bush administration.

“Because these regulations are outdated, millions of Americans lack the protections of overtime and even the right to the minimum wage,” Obama wrote in his March 13 memo. Thus his directive to the Department of Labor (DOL) to issue revised rules “to modernize and streamline” the overtime regulations currently in effect. The President instructed the agency to propose revisions that are “consistent with the intent of the Act” (the depression-era statute was aimed at both improving workers’ pay and working conditions and expanding employment by making it more expensive for employers to over-work their existing workforce) and that respond to the “changing nature of the workplace” as well. (Both management and labor-side advocates have observed that some of the statute’s old-timey provisions are unworkable today.) Obama also said the DOL must make the rules easier for both employers and employees to understand and apply.

What changes can we expect? The Obama memorandum itself was light on details, and the fact sheet issued by the White House offered only a slightly clearer picture of what changes to the white-collar exemption rules lay ahead. It still left much room to speculate as to what regulatory amendments are in store:

• A likely increase in the minimum salary floor under which employees are deemed non-exempt. Currently, employees must earn at least $455 per week in order to fall within one of the white-collar exemptions from overtime; before the 2004 rule changes, it was a mere $250. The left-leaning Economic Policy Institute noted that the value of the salary threshold has eroded considerably and now falls below the poverty level for a family of four. At its peak in 1970, the minimum salary requirement amounted to $1,071 per week in 2013 dollars, or $55,692 a year. It’s 57.5 percent lower now, at just $23,660 a year.

• Some practitioners speculate too that the minimum salary requirement might be linked to inflation or adjusted annually based on the cost of living index. It’s also been predicted that the DOL may drop the “highly compensated employee” test first adopted in 2004. That “shortcut” test assumes that employees earning at least $100,000 annually are exempt as long as they regularly perform “exempt” duties.

• Another likely fix will be to the “duties” tests. For example, currently under the rules, as long as managerial employees spend at least 50 percent of their time performing exempt duties, they could spend significant portions of their workdays doing “concurrent” non-exempt work — the same work their subordinates perform — while still falling within the executive exemption, as long as they are supervising employees and overseeing operations at the same time. This “concurrent duties” concept has been particularly troubling to employee advocates, especially as courts have come to construe the 50-percent provision as a “rule of thumb” rather than a hard and fast requirement. Plaintiff’s attorneys have challenged the provision aggressively (albeit with only modest success) as it applies to dollar store and other retail managers, who often report working 60-80 hours a week without overtime pay as they run the store while simultaneously stocking its shelves. Under these circumstances, the store manager’s “primary duty” is still managing the store’s operations, so the executive exemption applies.

• Of course, the DOL may think outside the “white-collar rules” box in current form, crafting new hurdles altogether for employers to jump before classifying an employee as overtime-exempt. In 2010, for example, the agency briefly floated the prospect of a new “right to know” rule that would require employers to disclose to their workers whether they were “employees” or “independent contractors,” and explain how that conclusion was reached. Observers surmised at the time that the DOL might also compel employers to expressly disclose to employees their status as exempt or non-exempt, and to provide the basis for that determination. Federal Register issuances in recent months have suggested that the DOL has an information collection request in the works seeking to find out “employees’ experiences with worker misclassification,” inviting speculation about whether the aborted 2010 rule proposal may be resurrected. Such a provision would tie nicely into Obama’s plans for tightening the overtime exemptions so that a larger percentage of the workforce would be entitled to premium pay for excess hours.

• The White House fact sheet expressly referenced New York and California, and the heightened salary thresholds those states impose for their exemptions. These and other states have other exemption requirements that are more stringent than the FLSA as well. The DOL may well look to the exemption provisions in these employee-friendly states when rethinking the federal white-collar rules.

A larger agenda. The President’s overtime directive is part of a broader Obama administration agenda to “give America a raise,” as he stated in urging Congress to raise the federal minimum wage. And while the President is powerless to implement a general minimum wage hike without legislative action, he was able to single-handedly raise the pay floor to $10.10 an hour for private employees of federal government contractors in an executive order issued last month. That’s not small change, given the number of the nation’s employers with U.S. government contracts.

Aside from these initiatives, a number of federal agencies have set their sights on independent contractor misclassification — another practice that keeps American workers’ wages artificially deflated, according to the federal government. (This issue has preoccupied state agencies and legislatures in recent years as well.)

Waiting game. For now, employers must sit tight as the DOL takes up the President’s directive with pen in hand — a process that should take months to play out — and be poised to review and offer public comments once a proposed rule is issued. Notably, when the last white-collar rule changes were proposed in 2004, the DOL received 75,000 comments, and the final rule revision differed materially than the rewrite first proposed. Sifting through a similar deluge and redrafting the rules accordingly — amidst what will surely be a contentious process — will slow the course of final rulemaking considerably. That means employers have a fair amount of breathing room before any final rule takes effect. That time can be used to ensure your exempt classifications currently in place are legally sound and to confer with counsel about your organization’s potential vulnerabilities in light of ongoing, informed speculation as to the DOL’s plans.

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