As the fight in Congress and the court of public opinion continues with respect to the proposed legislation to raise the federal minimum wage supported by President Obama, the White House has announced broad proposed reforms to the Department of Labor (DOL) regulations defining the exemptions from overtime under the Fair Labor Standards Act (FLSA). The law covers virtually every employer and employee in the United States. It provides a floor for the payment of fair wages, provides overtime provisions that are intended to fairly compensate workers for long hours of work, and provides various other protections for workers.
DOL Poised to Take Action
The DOL’s recently released 2014 Semiannual Regulatory Agenda is a non-binding statement regarding upcoming rulemaking. The Agenda provides a timetable for issuance of a proposed rule revising the regulations interpreting the FLSA’s “white collar” overtime exemptions, in conformity with the President’s recent directive. Certain “white collar” jobs are among those most commonly exempted from overtime under the FLSA, such as those employed in an executive, professional or administrative capacity. Under the current federal exemptions, employees earning $455 or more per week on a salary basis are not eligible for overtime pay if they also perform exempt duties under one of these three tests.
President Obama stated his administration’s view that the exemptions’ $455 salary threshold means that “millions of Americans aren’t getting the extra pay they deserve” because “an exception that was originally meant for high-paid, white-collar employees now covers workers earning as little as $23,660 a year.” In addition to questioning this current salary basis level, the President also urged simplicity in the proposed rules, likely a reaction to a recent study concluding that the current regulatory scheme is a breeding ground for wasteful litigation over FLSA issues.
Examples of Commonly Used Exemptions
Several exemptions are commonly used. For example, to qualify for the executive exemption under the current rules, the following duties test must be met:
- The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
As another example, to qualify for the administrative exemption under the current rules, the following duties test must be met:
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term must be applied in the light of all the facts involved in the employee’s particular employment situation, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision.
Potential Changes
It is not clear how the DOL will change the current rules. Nonetheless, a few changes are nearly certain to be made. The new rules will likely reintroduce tests requiring that exempt workers spend a specific percentage of their time engaged in exempt work, eliminating the flexibility and functional analysis of the current “primary duty” test. For example, the DOL could impose a bright-line threshold (such as 50%) for how much of an employee’s work time must be spent on exempt duties.
The new rules likely also will seek to raise the minimum salary for an exempt white collar worker, which is currently $455/week under federal law (higher under some state laws). One study proposes $984/week as an appropriate salary basis. Some estimate that the new salary floor could be $40,000 annually, or even higher.
Next Steps
ADP TotalSource will continue to monitor this expected change in the FLSA landscape. If these yet-to-be-proposed changes become final, as with the last revisions in 2004 employers may need to implement changes to classifications. Note that this new rulemaking only addresses federal law; many states already impose a higher salary requirement and differing duties requirements for exemption.
Human Resources Business Partners stand ready to help clients to comply with wage and hour laws including the anticipated changes outlined above.