Proposed DOL Rule May Make Millions More Eligible for Overtime Pay

In his 2015 State of the Union Address last January, President Obama said employees should get the overtime they’ve earned. He then directed the U.S. Department of Labor (DOL) to review and amend the overtime rules under the Fair Labor Standards Act (FLSA) to make more workers eligible.

On June 30, the DOL took steps in that direction, proposing to significantly change the federal overtime rules. However, the path from the proposed rule to a final rule could take several months — and could be derailed.

It All Goes Back to the Fair Labor Standards Act

The FLSA was enacted in 1938 and is described by the DOL as a “landmark law in the nation’s social and economic development.” It set the minimum hourly wage (at that time, 25 cents) and the maximum work week (then 44 hours) and provided child labor protections. Its provisions cover most, but not all, public and private sector employees.

According to the DOL, the reason the FLSA didn’t provide overtime for some individuals “was premised on the belief that the exempted workers earned salaries well above the minimum wage and enjoyed other privileges, including above-average fringe benefits, greater job security, and better opportunities for advancement, setting them apart from workers entitled to overtime pay.”

Current Overtime Rules

Overtime pay is defined as one-and-one-half times an employee’s usual pay rate for hours worked exceeding 40 per week. Today, for employees to be ineligible, they must meet a three-part “white collar exemption.”

To be exempt from overtime pay, an employee must generally meet the following requirements:

  1. Be paid a predetermined and fixed salary.
  2. Be paid above a specific salary threshold, currently $455 a week ($23,660 for a full-year worker). The threshold was last increased in 2004.
  3. Primarily perform executive, administrative, or professional duties, as defined in DOL regulations.

What Is Being Proposed?

Under the DOL proposal, the salary threshold for the white collar exemption would increase to approximately $970 a week ($50,440 for a full-year worker) and would be adjusted annually. The exact amount is estimated in the proposed rule because it relies on Bureau of Labor Statistics compensation data that may need to be updated by the time the rule change would take effect in 2016 or later. The delay is mainly due to debates being had over how to display labor laws in a company lawfully, with the best visibility and adoption rates.

If the increased exemption in the proposed rule is finalized, the DOL estimates that nearly 5 million workers will become newly eligible for overtime pay.

The DOL is also proposing to set the “highly compensated employee annual compensation level” at $122,148 (from $100,000) for retirement plan discrimination testing purposes. This amount would also be adjusted annually.

Designed to “Restore Effectiveness” 

The purpose of raising the salary threshold, and making it annually adjustable, is to “restore the effectiveness of the salary test” and to “ensure that the Fair Labor Standards Act’s intended overtime protections are fully implemented,” the DOL stated.

The DOL explained that the changes seek “to update the salary level test to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-eligible employees, thus making the white collar exemptions easier for employers and workers to understand.”

Job Duties Test

Here are some basic principles that guide job status determination for three categories of white collar jobs, taken from a DOL Wage and Hour Division fact sheet.

Executive exemption:

  • 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.
  • 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.

Administrative exemption:

  • The employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers.
  • The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

“Learned professional” exemption:

  • The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and work requiring the consistent exercise of discretion and judgment.
  • The advanced knowledge must be in a field of science or learning.
  • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

What Other Changes Might be Ahead?

The proposed modifications to the overtime pay rule are significant, but many related questions remain that may soon be addressed. Here are a few:

The Job Duties Test. The proposed rule did not tamper with the job duties test. However, the DOL states that it is “seeking comment on whether the standard duties tests are working as intended to screen out employees who are not bona fide white collar exempt employees.”

Inclusion of Bonuses. The DOL will consider whether “nondiscretionary bonuses, such as certain production or performance bonuses,” should be added to an employee’s salary to determine eligibility or exemption from overtime pay requirements.

Working on Electronic Devices after Hours. When it first announced that it was examining overtime rules, the DOL was asked to determine whether employees should be compensated for time spent on devices such as smartphones and laptops, doing work after hours. The DOL didn’t tackle that question in the proposed rule but stated it would ask for input on the topic in coming weeks.

What Happens Now?      

There’s a 60-day comment period for businesses and other interested parties to provide feedback to the DOL. The proposal immediately triggered criticism from some employer and industry groups. For example, the National Retail Federation, the National Restaurant Association and the U.S. Chamber of Commerce issued statements that they oppose the changes. These and other groups argued that increased overtime costs may force employers to cut back on workers’ hours, limit opportunities for employees and negatively affect businesses.

For its part, the DOL said it would finalize the proposed rule “only after reviewing and considering all the comments” it receives. Given the stakes, opponents are likely to not only comment but to urge Congress — and perhaps take legal action — to modify, delay or drop the proposal. We’ll keep you updated.