Employers Need to Update Employees’ Overtime Classifications - and Will Likely See an Increase in Payroll Costs

The Obama Workplace Revolution Continues
By Angel Castillo Jr
Jul 13, 2015

While President Obama has not been able so far to obtain necessary Congressional support for increasing the federal minimum wage, he is moving expeditiously to increase the number of American employees eligible for overtime pay.

This he can do by himself through executive action -- without Congressional legislation.

Under the federal Fair Labor Standards Act of 1938 (FLSA), employers must pay their employees "time-and-a-half" wages (one and a half times the employee's regular hourly wage) for all hours worked in excess of 40 in any work week.

However, certain employees can be classified as being “exempt” from overtime pay if their work duties meet certain criteria established in the FLSA and in Labor Department Regulations. These typically salaried “white collar” exempt categories include executive, administrative, and professional employees, along with certain computer employees and “outside salesmen” (salespersons who work outside the office).

One of the threshold criteria to qualify for an exemption is that the employee must earn at least $455.00 per week, that is, $23,660.00 a year. Today only 8 percent of full-time salaried workers fall below that income level. (The federal poverty line for a family of four is $24,008.00).

Obama, through new regulations that he directed the Labor Department to announce on June 30, is pushing the qualification threshold up to salaries of at least $970.00 per week or $50,440.00 per year.

The President estimates that the proposed change will affect about 4.7-million workers in 2016, including 370,000 in the state of Florida. The announcement was the culmination of a project set in motion by a March 13, 2014, Presidential Memorandum in which Obama had directed the Department to update the regulations defining which ‘‘white collar’’ workers are protected by the FLSA’s minimum wage and overtime standards.

The Labor Department is also proposing automatically updating the salary level threshold in the future “to prevent the level from becoming outdated with the often lengthy passage of time between rulemakings”. The proposed new regulations would contain a mechanism to automatically update the salary and compensation thresholds on an annual basis using either a fixed percentile of wages or the CPI–U (Consumer Price Index that only considers the prices paid for goods and services by those who live in urban areas). The CPI–U calculates inflation by measuring the average change over time in the prices paid by urban consumers for a set basket of consumer goods and services.

Additionally, DOL is considering whether revisions to the job duties tests are necessary in order to ensure that these tests fully reflect the purpose of the exemptions. Possible revisions include requiring overtime-ineligible employees to spend a specified amount of time performing their primary duty (e.g., a 50 percent primary duty requirement as required under California state law) or otherwise limiting the amount of nonexempt work that an overtime-ineligible employee may perform, as well as adding to the regulations additional examples illustrating how the exemption may apply to particular occupations.

The federal minimum wage has stayed at $7.25 for the past six years, while the regulations determining who is entitled to receive overtime pay have not changed since 2004. President Obama has called on Congress to raise the national minimum wage, and took action last year by signing anExecutive Orderto raise the minimum wage to $10.10 for all workers on Federal construction and service contracts.

The Labor Department estimates that 128.5 million workers throughout the United States are subject to the FLSA and the Department’s regulations, while 15.7-million are not. Most of the protected workers are covered by the FLSA’s minimum wage and overtime pay protections.

Once the new overtime rules take effect, employers will need to decide whether or not to raise exempt employees’ salaries to the new threshold to retain the exemption; or to keep current salaries below the new threshold where they are and start paying overtime for hours worked in excess of 40 in a week. The new rules will likely impact managers and supervisors in the retail, fast-food, and janitorial industries right away.

The Notice of Proposed Rulemaking published by the Labor Department on July 6, 2015, in the Federal Register invited all interested parties to submit written comments on the proposed rule by September 4, 2015. After reviewing and considering all the comments, the Labor Department will determine the final language of the rule next year.

The text of the proposed rule and commentary, totaling 97 pages, is available below:

(http://www.gpo.gov/fdsys/pkg/FR-2015-07-06/pdf/2015-15464.pdf)