Employer costs for meeting the overtime exemptions under the Fair Labor Standards Act (FLSA) will be increasing but not imminently. The process for that increase surely has begun.
On March 13, 2014, President Obama instructed the Department of Labor (DOL) to review the "white collar" exemptions from the FLSA. As readers know, an employer is not required to pay overtime to employees who meet these exemptions. Contrary to much of the commentary regarding the announcement, the President did not give the DOL specific instructions. Rather, the President instructed the DOL to propose regulations that will "modernize and streamline" current overtime regulations.
The most likely area of modernization will be an increase in the minimum salary needed to meet the exemptions. In candor, the salary level likely needs such "modernization" but the strong debate will be to what level.
The white collar exemptions provide that executive, administrative, and professional employees who meet both a minimum-salary threshold (the "salary-basis test") and who have certain job responsibilities (the "job-duties test") are exempt from entitlement to overtime premium pay.
Salary-Basis Test – Likely. The salary-basis test has not been increased since 2004 when the George W. Bush Administration increased the weekly minimum salary from $155 to $455. The original salary basis, $155 per week, had been set in 1975 and is equivalent to $970 per week in current dollars. The $455 per week threshold set in 2004 is equivalent to $553 per week today. The DOL most likely will raise the salary-basis-test threshold once again, especially since this dollar amount is the easiest piece of the exemptions with which to tinker and the most easily publicized change the DOL could make.
Job-Duties Test – Maybe. The President emphasized the need for the exemptions to reflect the modern economy and address the nature of today's workplace. To that end, the DOL may attempt to tackle the quagmire that is the job-duties test. As many employers know too well, some job positions are not easily classified as exempt or non-exempt under this test, which uses such ambiguous phrases as exercising discretion and independent judgment about matters of significance, using advanced knowledge and performing intellectual work, exercising authority and management in the workplace, or other such phrases, as appropriate to the specific exemption sought.
Rule-Making Process – Definitely. No matter what the DOL decides to revise, it must still follow the rule-making process for new regulations. This process requires the DOL to: (1) propose new regulations; (2) notify the public of the regulations; and (3) provide a period of weeks or months for comment before any such regulations can take effect. After receiving and reviewing these comments, the DOL typically revises the proposed regulations before publishing final regulations. Because of the time required for this process, employers are unlikely to have new tests for the white collar exemptions before the end of 2015 and may be looking to 2016 (still within oversight of the Obama Administration).
What can employers do now? This new directive certainly will increase the public's awareness of these exemptions.
- Consider a review of employee classifications to determine whether you are compliant with current DOL regulations.
- The best time to address any classification issues is when other changes are taking place. If groups of employees are reclassified at once in response to new regulations (some because of the new regulations and some timed to coincide with the regulation changes), questions about potential past misclassification are minimized.
- Prepare a strategy for reclassifying any workers identified as misclassified during the self-audit.
- Remember, though, new regulations likely do not go into effect until 2015 or 2016. Consult with legal counsel to determine when to conduct a self-audit and the potential risks of waiting to reclassify.
- Participate directly, or through industry and business organizations, in the rule-making process.
If you have questions about the potential changes to the FLSA exemptions, how the exemptions work currently, or how your business may be affected, contact one of the attorneys in the Labor & Employment Practice Group for advice on how to navigate the FLSA. Classification is a hot issue for regulators and worth an investment of time to understand your business model and the regulations before you receive notice of an audit.