The U.S. Department of Labor's methodology and minimum salary threshold set forth in its proposed revisions to the Fair Labor Standards Act's "white collar" exemptions are "unprecedented in the FLSA’s 77-year history," explained Littler Principal Tammy McCutchen during a Subcommittee on Workforce Protections hearing. The DOL's Wage and Hour Division released its proposed rule last month. Under the terms of the proposal, the agency would set the minimum salary threshold used to separate exempt from non-exempt employees at the 40th percentile of the salary earned by all non-hourly paid employees, and create a mechanism for annual automatic increases. By the year 2016, when a final rule is expected to take effect, this calculation would result in a minimum salary threshold of $970 per week, or $50,440 per year.
Testifying on behalf of the U.S. Chamber of Commerce, Ms. McCutchen said that while it is "time for a change" in the salary threshold, there are flaws in the DOL's current proposal. The purpose of setting such a threshold is to provide a "ready method of screening out the obviously non-exempt employees.” Therefore, the DOL should not establish so high a threshold that it "expands the number of employees eligible for overtime beyond what Congress envisioned when it created the exemptions." This rulemaking, McCutchen said, does just that.
Even if an employee earns the minimum salary level, an employer cannot classify that employee as exempt from overtime unless that employee also meets other tests for exemption, including the FLSA's "duties" test. In many sectors, McCutchen explained, there are employees who earn below the proposed $50,440 limit, but both DOL investigations and court decisions have determined they are exempt from overtime under the duties test.
Moreover, the proposed increased salary level for exemption is higher than that established under current California ($37,440) and New York ($34,124) wage and hour law. Both of these states have high costs of living compared to those in the rural South and the Midwest. As a result, McCutchen said, the DOL's proposal will have a disproportionate impact in states with much lower costs of living.
Even if historical salary levels are corrected for inflation, the $50,440 salary level is "not supported," she testified. Using a Bureau of Labor Statistics calculator, McCutchen estimated the average inflation-adjusted salary levels from 1938 through today is about $42,000. If the methodology used in 1958 were applied, setting the salary level at the 10th percentile of low-wage regions and industries, the salary threshold would be even lower ($34,167). Therefore, the DOL's method of setting the minimum salary level at the 40th percentile of all non-hourly-paid employees "results in a minimum salary for exemption which is $20,000 higher than the salary level if the DOL applied the 2004 methodology, and $15,000 higher than the salary level if the DOL applied the 1958 methodology."
McCutchen next took issue with the DOL's approach to changing the duties test. In its proposed rule, the DOL does not offer specific language to alter the test, but instead sets forth a list of "issues for discussion." The concern, McCutchen said, is that the DOL in its final rule will revise the duties test without providing specific language upon which interested stakeholders can provide input. Employers are particularly concerned that the DOL will implement a quantitative-type of rule such as the one in place in California, in which employees must perform non-exempt duties for more than 50% of their time for them to be considered non-exempt. According to McCutchen, such a rule has resulted in "considerably higher levels of litigation in California," given the difficulty in proving the amount of time employees spend on one type of activity versus another.
In response to questions from Rep. John Kline (R-MN) about the purpose of the rulemaking, McCutchen clarified that this issue "is not a minimum wage debate. The goal is to have rules that allow at least some bright-line judgments about who earns a salary low enough that they are obviously nonexempt."
Another issue McCutchen raised during the hearing is the impact being re-classified as non-exempt has on employees. She explained there are disadvantages to being non-exempt, including the decrease in workplace flexibility and the loss of opportunities to earn incentive pay that hourly employees often experience. According to McCutchen, non-exempt employees do not generally have the opportunity to earn incentive pay and bonuses, as employers have to pay overtime on such bonuses, and the calculation is complex and invites the possibility for litigation.
Finally, Rep. Glenn Thompson (R-PA) asked McCutchen to expound upon the DOL's proposal to include mechanisms for automatic increases to the salary levels based on either a percentile calculation or indexing the levels to inflation. McCutchen questioned Congress' intent to create such automatic increases, and pointed out using the percentile method in particular would have a "ratcheting effect" on future increases.
Subcommittee Chairman Tim Walberg (R-MI) echoed many of these concerns, but claimed the "most alarming" result would be the limits to workplace flexibility and opportunity for advancement.
Panelist Eric Williams, Chief Operating Officer of CKE Restaurant Holdings, Inc., who began his career as an hourly employee at a Hardee’s restaurant and now owns seven franchises, said the proposed rule would prevent many employees from advancing through management ranks, and that many current employees would consider it a demotion to be reclassified as hourly employees. Such a change would have a "demoralizing effect" in the workplace, he testified.
The rule, if finalized, would also be cost-prohibitive to many employers. Elizabeth Hays, Director of Human Resources for the non-profit and publically funded MHY Family Services, testified on behalf of the Society for Human Resource Management. She stated that about 50 of her current salaried employees would have to be reclassified under the new rule, a result that "presents the risk of my organization closing its doors." The nature of her work, she explained, often requires therapists and managers at her organization to work variable hours in order to deliver needed services. To continue to offer such services at their current rate of funding should these employees be deemed hourly is "an impossibility."
Rep. Mike Bishop (R-MI) agreed that the cost of compliance would "choke off small businesses."
Chairman Walberg lamented that it is "equally disappointing" in what the rule does not do: address the complexities of the current FLSA regulations and proliferation of FLSA litigation. "It's a missed opportunity."
An archived webcast of the hearing and links to the panelists' testimony can be found here.