Some time this autumn, the US Department of Labor's Wage and Hour Administration will send a draft proposed regulation to the Office of Management and Budget's Office of Information and Regulatory Affairs (OIRA). This regulation, if it is finalized, will make important changes to the rules governing whether executive, administrative and professional employees must receive time and one-half their regular hourly rate of pay for hours worked in excess of forty in a week under the Fair Labor Standards Act (FLSA). Three months or less after receiving the proposed regulation, OIRA will release it and the Labor Department will publish it in the Federal Register.
Until the proposed regulation is published, we will not know what the Labor Department will propose. But we know that the Obama Administration will make an aggressive push to finalize the regulations and, more likely than not, the overtime rules will change in a meaningful way. On March 13, 2014, President Obama issued a memorandum to his Secretary of Labor directing him to revise the overtime regulations. Of course, the President doesn't need to publish memos to his staff to get things done. By making this assignment public, however, the President emphasized that the new proposed regulations will have his strong support and potential opponents can expect a fight over whether more workers should receive overtime pay. The smart bet is that the regulations will be finalized. Expect them by the middle of 2016.
The current test for determining whether executive, administrative and professional employees are exempt from the FLSA's overtime requirement has four elements. First, only employees paid a salary can be exempt ("salary basis"). The salary basis test will likely remain untouched in the proposed regulation. The law in this area is reasonably well-settled and straightforward. Second, the salary must exceed $455 per week ("salary threshold"). Third, the employee must engage in certain job duties specified in the regulations ("substantive duties"). Finally, the specified duties must be the employee's "primary duty." These last three elements are ripe for revision in the Labor Department's proposal.
The salary threshold is the likeliest part of the test to be changed. The current threshold amounts to $23,660 for a full-year employee. Discussion in Washington has centered on an increase to $900 per week or more. Another possibility is that the Labor Department will adopt the average weekly wage of private-sector non-supervisory employees, or around $683 per week, as the new threshold. At any of these levels, millions of additional workers who are currently treated as exempt will be newly subject to the FLSA's overtime requirement. Every employer that currently classifies any of its managers, administrators or professionals as exempt employees should assess whether the higher salary threshold will change these employees' overtime status. For some employers, the budget impact will be substantial, so planning should begin immediately. Since the proposed rule will very likely index any new threshold to some measure of inflation to reduce the need for future changes to the regulation, employers should expect to undertake this assessment annually, if not more frequently.
The Labor Department's changes to the overtime regulations could end with the salary threshold. But the proposed regulation may go farther. Executive, administrative and professional employees each have different substantive duties tests. However, the proposed regulation would likely focus on the exemption for "executives." An "executive" need only manage a defined unit or establishment, supervise two or more employees, and have the authority to hire and fire or make recommendations about hiring, firing, promotions, or advancement. The Labor Department could propose to make this test more difficult to satisfy.
There has already been a great deal of grumbling from the business community and trade associations about possible changes to the substantive duties tests. This is the part of the exemption rules that generates the most litigation since it requires a fact-intensive, case-by-case analysis and the outcome cannot always be predicted. Many employers have concluded, for all of its flaws and ambiguities, they are comfortable enough applying the existing test that they do not want it to change. It will be interesting to learn if the Labor Department takes on this fight, even after raising the salary threshold. If it does, and the changes survive the regulatory process, employers will be forced to reexamine the work responsibilities of entire categories of exempt managers, supervisors, administrators and professionals, as well as the people with whom they work.
The proposed regulations may also clarify the meaning of "primary" in the "primary duty" test. Under the existing regulations, it is possible to be an exempt employee even when spending more than half of work time performing non-exempt work, for example, tending the cash register in a retail store or serving customers in a fast-food establishment. Courts have found employees for whom non-exempt work constituted 75 percent, 80 percent, or even 99 percent of their time to be exempt. The Labor Department may propose a bright line test of 50 percent or another fixed percentage as a floor for determining whether exempt responsibilities, like managing for an executive employee, are the "primary duty."
Even though this new overtime regulation is likely to move quickly through the process to finalization, employers have the opportunity to influence the substance of the regulation before it becomes final and has the force of law. The proposed regulation will be open to comment by interested parties, probably for 90 or 120 days. Employers can share their knowledge, experience and evidence in comments filed with the Labor Department during the comment period. They can also suggest how the regulations should change to best serve the 21st century workplace and the people who work in it.
In the meantime, employers who currently classify employees as exempt under the existing regulations should inventory their overtime practices. They should review job classifications and pay structures, compensate misclassified employees, eliminate "off the clock" practices and double-check rate calculations. They should also consider seeking counsel from objective outsiders who can offer unfettered judgment about where they currently stand and where the new regulations might take them.
The new overtime regulations will not be final for at least a year. But it is never too soon to avoid the risk of overtime liability.