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Employment Law

An Official Update Regarding Proposed Overtime Pay Exemptions

By December 7, 2016March 23rd, 2023No Comments

Note: The original version of this post, found here, was updated in June and November 2016 to stay current with changes in the regulatory climate and pending federal court litigation.

The enactment of the new regulations that would have increased the salary requirement to make millions of employees eligible for overtime pay under the Fair Labor Standards Act has been suspended indefinitely due to a recent court ruling.  On November 22, 2016, a Texas federal court granted an Emergency Motion for Preliminary Injunction that prohibits the U.S. Department of Labor (“USDOL”) from enforcing the December 1, 2016 implementation date for its Final Overtime Rule. See State of Nevada, et al. v. U.S. Dept. of Labor, et al., Case No. 4:16-cv-00731 (E.D. Tex.). The Final Rule presented considerable compliance risks concerning overtime pay requirements for employees covered under the federal Fair Labor Standards Act (“FLSA”) as millions of additional employees would have become eligible for overtime pay.

President Obama announced the USDOL’s publication of its Final Rule redefining FLSA’s overtime pay exemptions on May 18, 2016.  The new regulations seek to boost the minimum annual salary needed to trigger FLSA’s white collar exemption, described below, from overtime pay from $23,660 to $47,476. In other words, employees earning less than $47,476 would now be eligible for overtime because they would cease to be “exempt” from FLSA’s overtime pay provisions, regardless of whether they perform traditionally “exempt” duties. By the USDOL’s own state-by-state breakdown, some 4.2 million would become eligible for overtime pay under the Final Rule.

The “white collar” job classifications that are exempt from FLSA coverage are: (1) executives; (2) “administrative employees”, i.e., those whose duties primarily include office work that is directly related to the employer’s business operations and requires the regular exercise of independent judgment and discretion; (3) professionals; (4) computer professionals; and (5) and outside sales employees. Whether a particular job classification is truly exempt depends on an employee’s duties along with the employee’s annual salary. FLSA exemptions are highly regulated and litigated—and, aside from being dense, these regulations can also be dynamic.

What Happens Now? Given the court’s November 22 ruling, you might be asking if your business is in the clear? That’s a fair question. Of course, the USDOL “strongly disagrees” with the court’s decision and notes that its Final Rule “is the result of a comprehensive, inclusive rule-making process, and we remain confident in the legality of all aspects of the rule. We are currently considering all of our legal options.” See U.S. DOL, Important Information Regarding Recent Overtime Litigation in the U.S. District Court of the Eastern District of Texas, https://www.dol.gov/featured/overtime (last visited Nov. 25, 2016).

The fate of the Final Rule appears unclear, but only time will tell. Courts are obligated to rule on injunctions as quickly as possible; however, with President Obama’s second term ending on January 20, 2016, the USDOL may be running out of “legal options.” Whether and to what extent the new administration will change labor policies is unclear, although Congress is likely to renew its efforts to challenge the Final Overtime Rule. The only thing that employers can be sure of right now is that they have more time to consider their federal compliance strategies. Employers should think twice before abandoning their compliance initiatives altogether though, given the uncertainty of the Final Rule and the trend among state regulators to adopt more stringent labor and overtime rules.

Changes to the “Duties Test?” The Final Rule does not include any changes to the “duties test” for the “white collar” exemptions.  When the new regulations were first proposed last year, USDOL received more than 250,000 comments. Many commentators pushed for a delay in the effective date of the regulations, citing the need for time to make operational adjustments, including reevaluating employees’ job classifications, duties, work schedules, and compensation plans. Commentators also responded to the USDOL’s request for comments on possible changes to the “duties test.” This request—given that the USDOL’s proposal did not itself suggest any changes to the duties test—was rather surprising.

The USDOL’s request for comments on the duties test spurred spirited discussions between employers and employment law practitioners up until the Final Rule was published. The duties test requires that, in addition to meeting the salary threshold, the “primary” job duties of exempt employees fall within one of the white collar job classifications. For now, this is unlikely to change. Nevertheless, the USDOL did request comments on changes to the duties test so a change to this test may arise at a later date.

Further, notwithstanding what happens at the federal level, employers should note that state regulators may impose rules that differ from those implemented by the federal government. For example, the duties test used in California is slightly different than the duties test promulgated by the USDOL. At a high level, the key distinction between the USDOL’s current test and the California test is best described as quality versus quantity. Under California’s strict quantitative standard, exempt employees must be “primarily engaged in” exempt job duties by spending more than 50% of their time performing them. In contrast, the general rule under the USDOL’s more qualitative test is that exempt employees must perform exempt duties at least 50% of the time. Therefore, in certain circumstances, employees spending less than 50% of their time on exempt work can still satisfy the primary duty requirement under the rule.

Employee Reclassification. Even without changes to the duties test, the breadth of the increase to the overtime salary threshold by itself nevertheless has forced employers to think seriously about employee reclassification under the USDOL’s Final Rule. Proper classification is critical because, as some employers know all too well, misclassifying employees as exempt under the FLSA can be a costly mistake. For example, in 2012, behemoth retailer Wal-Mart paid out $4.8 million in back wages to more than 4,500 managers who were misclassified as exempt from the FLSA overtime requirements. In 2014, home improvement retailer Lowe’s paid $9.5 million to settle a class action filed by its HR managers alleging they were misclassified. And last September, the USDOL auditors found that Halliburton, the oil field solutions giant, had misclassified some 28 job positions as exempt and required the company to pay out $18.2 million in overtime owed to more than 1,000 employees.

Tips to Keep in Mind. For smaller businesses, dates with USDOL auditors or protracted litigation with employees can have serious, if not calamitous, effects on finances and operations. Now is the time to take that critical step to reassess your employee compensation plans. Below are a few tips to keep in mind that can help lessen compliance risks while keeping costs to a minimum:

  1. Review Employee Classifications. Employers should understand their employees’ compensation structures and job classifications—as well as the differences between exempt and nonexempt status under the FLSA. Remember that under the Final Rule, employees earning less than $47,476 are most likely nonexempt and thus eligible for overtime pay. Try and forecast the impact of anticipated reclassifications on future operating costs, evaluate the job duties of all employees, and plan accordingly.
  2. Check Employees’ Hours. Employers can reduce the impact of the Final Rule by closely monitoring and, where appropriate, explicitly limiting the number of hours employees work each week. Consider any of the various tools that exist to help employers make informed staffing choices. Some of these tools provide automated time and attendance systems that perpetually track hours worked. Such systems can automatically alert you whenever an employee is closing in on working 40 hours in a given workweek. An early alert might give you the extra time you need to make informed scheduling changes before the work week ends.
  3. Consider Hourly Pay. For employees who often work less than 40 hours per week, consider converting them to nonexempt, hourly status. This can give you the scheduling flexibility you need. However, you still need to proactively monitor hourly employees’ work schedules to ensure compliance with overtime rules. Additionally, consider how this change might affect deductions, time off, and other aspects of employment and compensation. Remember to communicate any changes to employees in advance and consider how employees may perceive these changes.
  4. Decrease Costs by Paying More. Particularly for small businesses, raising the salaries of employees who regularly work more than 40 hours per week above the $47,476 overtime threshold can decrease costs in the long run. However, this strategy should be carefully thought out. Of course, you will need to review the relevant regulations and audit current job responsibilities to ensure that the employees will actually qualify for the exemption. Also be sure to consider how a given employee’s increased salary would compare to the overtime costs that you estimate would otherwise apply once the Final Rule goes into effect.

Will Congress Pass Legislation Nullifying the Final Rule? During the last session of Congress, you may have heard that federal legislators introduced a bill that would have pushed the effective date of the Final Rule into 2017. “The Workplace Advancement and Opportunity Act” (H.R. 4773 and S. 2707) (“the Act”) reflected legislators’ concerns that the USDOL failed to account for a variety of negative factors, including the harsh effects on small businesses, non-profits, and lower-wage industries; as well as regional cost-of-living and salary differences, the curtailing of workplace flexibility, and the compliance costs now facing employers. The next Congress could revive this bill or introduce similar legislation but here again, only time will tell. In the meanwhile, employers should nevertheless continue proactively addressing compliance concerns at both the federal and state levels.

Notwithstanding these recent developments, employers should not rush to throw their compliance initiatives out the window.  The sooner you take the time to review employee classifications, staffing systems, and compensation plans, the better. Navigating state and federal labor regulations will take time. But being proactive now rather than reactive later is, in this case, better for business.

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