Executive Summary: President Barack Obama has directed the Department of Labor to "update" and "modernize" overtime rules to expand the number of workers eligible for overtime pay.
Currently, the details of the proposal are unknown and we do not expect the actual proposed regulations to be released for some time. However, the DOL's primary focus appears to be raising the salary threshold, which is the minimum weekly amount a worker can make to be eligible for almost all the white collar exemptions. The threshold currently is $455 per week. Raising the threshold could result in nearly 10 million workers being newly eligible for overtime pay, depending on how high the salary threshold is raised.
Should the white collar exemptions be eliminated for certain employees, we anticipate that employers will be faced with one or more of the following options: (1) pay the now-non-exempt employees substantially more in overtime; (2) closely scrutinize and monitor the hours employees work to avoid incurring overtime liability; (3) decrease employees' hourly rates in order to pay employees the same amount with overtime pay included; (4) convert the workforce to part–time status to avoid overtime issues all together; or (5) some combination of each of these options. Regardless of which option is chosen, these formerly exempt employees will likely lose the flexibility in their schedules without any guarantee of increasing their wages, and employers will face increased administrative burdens in tracking hours worked. Employers should also anticipate a renewed surge in wage and hour litigation.
Increasing the Salary Basis Test
Most exemptions claimed from overtime fall under the "white collar" exemptions located at 29 C.F.R. Part 541. The exemptions located in Part 541 require employees to satisfy two tests to be exempt: the salary basis test and the duties test. Currently, the salary basis test requires that salaried workers earn at least $455 per week. It is unclear how high the DOL will propose raising the salary threshold. However, the Economic Policy Institute (EPI), a non-profit funded largely by labor union contributions, recently recommended an increase to $970 per week, or $50,440 per year. The EPI claims that this would restore all of the overtime protection lost to inflation since 1975, when the salary threshold was set at $250 per week. President Barack Obama and Labor Secretary Thomas Perez's references to the eroding effects of inflation also suggest that the DOL may propose tying the salary basis to the Consumer Price Index or similar index.
Predictions Regarding the Exemptions' Duties Test
Aside from the proposed changes to the salary basis test discussed above, there has been no discussion as to what proposed changes, if any, will be made to the duties portion of the exemptions. However, based on EPI's "wish list" from its comments to the passing of the 2004 regulations, we expect that the "duties" portion of the exemption could be impacted as follows:
- Professional Exemption: redefining what types of degrees qualify for learned and creative professionals and adding a "judgment" element to the exemption. Specifically, the proposal may eliminate the exemption for chefs, cooks, nursery school teachers, funeral directors, and embalmers, among others. Also, we anticipate that the proposal may seek to eliminate the current regulation's allowance for substantial experience as an alternative to an academic degree, and impose a requirement that, in order to claim the professional, exemption employees must possess an academic degree.
- Executive Exemption: creating a percentage threshold to determine if the exempted employee spends the majority of his or her time supervising employees or performing other managerial work. The current regulations state that management must be a primary duty without quantifying the amount of time spent in management activities. We anticipate the proposed regulations may require that up to 50 percent of an employee's duties be managerial for the executive exemption to apply.
- Administrative Exemption: redefining and codifying the "production/administrative dichotomy." This proposal will either prohibit the use of the administrative exemption to anyone who is involved in the "production" of the goods or services that an employer sells or provides or, like the executive exemption, provide a threshold only allowing the exemption to apply to workers who perform a certain minimum percentage of "administrative" work.
- Highly Compensated: raising the highly compensated threshold above $100,000 and allowing for future increases based upon increases in the CPI.
When Should Employers Expect To See Changes?
Due to the multiple steps required in agency rulemaking, it is unlikely that any proposed rules will take effect anytime soon. First, the agency must draft the proposed rules, a process which can take several months or more. After the proposed rule is published, the agency must elicit comments from the public, a process that will most likely take at least another three months, but probably more. Finally, because this is a significant modification to the regulations, the final rule will have an effective date of at least 60 days after the publication of the final rule in the Federal Register. Further, Congress and the Government Accountability Office may be involved in the process, substantially postponing the implementation of a new rule. Congress may also exercise its oversight in other ways, such as holding hearings and posing questions to agency heads, by enacting new legislation, or by imposing funding restrictions on the agency. Results of the mid-term elections may also further complicate the timeline. The entire rulemaking process can easily take up to one year, but in this case we predict it will take much longer.
How Can Employers Be Involved In The Process?
Issuing new regulations is a public process. The agency must publish the proposed rule and elicit comments on the proposal from the public, in a process called "notice and comment." Members of the public can comment on proposed rules in various ways, either by sending in written comments or participating in hearings. Members of the public may comment on an individual basis, or may work together with trade associations, chambers of commerce or other organizations to submit comments. For more information on understanding and participating in the notice and comment period, see http://www.dol.gov/regulations/participate.htm.
What Does this Mean for Employers?
The intent of the proposed regulation is to make more employees eligible for overtime. As discussed above, the scope of the proposed changes is unknown, but we do know that the DOL is looking to certain industries. According to the U.S. Secretary of Labor, the proposed regulations will have a major impact on New Jersey gas station managers, as well as retail, fast food and janitorial workers.Regardless, all employers should expect that the changes:
- will not likely be finalized before the end of 2015;
- will not require employers to pay employees a higher wage unless employees work over 40 hours;
- will force employers to better control or reduce some of their employees' hours – which means employees may not have the flexibility in schedules and workplaces that currently exists;
- will require employers to revisit how non-exempt employees are classified and compensated to determine whether to pay a salary or hourly rate and how to adjust pay for overtime premiums; and
- will result in an increase in wage and hour litigation.
Until more details about the proposed changes are available, it will be difficult to predict what effect the proposed changes will have on businesses. We will continue to update you as new information becomes available.