What The Proposed Changes To FLSA Overtime Rules Mean For Employers
Several weeks ago, the US Department of Labor (DOL) issued its much-anticipated proposed changes to the "white collar exemptions" provided by the Fair Labor Standards Act (FLSA). These proposed rule changes were published in response to a presidential memorandum issued by President Obama in March of 2014 directing the DOL to modernize and simplify these regulations.
About the FLSA
The FLSA was originally passed in 1938 in order to guarantee employees a minimum wage and limit the numbers of hours an employee could work without additional compensation.
Generally speaking, most employees whose jobs are covered under the FLSA are considered non-exempt. However, the FLSA also provides exemptions from both the minimum wage and overtime pay requirements for certain classes of employees. In order to qualify for an exemption, employees’ job duties and salaries must meet specific requirements. It is important to note that job titles or being paid on a salary basis does not determine whether an employee is exempt or not.
(Check out our Exempt vs. Non-Exempt Employees post for a more detailed explanation of the differences between exempt and non-exempt employees.)
The DOL, the agency in charge of enforcing the FLSA, has updated the salary requirements seven times since 1938, most recently in 2004.
What are the "White Collar Exemptions"?
The FLSA defines five classes of "white collar" employees that may be considered exempt from its minimum wage and overtime rules: executive, administrative, professional, outside sales and computer employees.
(For a full overview of the white collar exemptions, download our 'White Collar' FLSA Exemptions Fact Sheet.)
In order to qualify for one of the white collar exemptions, an employee must meet a salary basis test, a salary level test and a duties test.
- Salary Basis Test: The employee must be paid a predetermined and fixed salary not subject to reductions based on variations in the quality or quantity of work performed.
- Salary Level Test: The amount of salary paid must meet a minimum specified amount.
- Duties Test: The employee's job duties must primarily involve executive, administrative or professional duties, as defined by the FLSA.
If an employee meets the requirements of all three tests, he or she can be considered exempt from the minimum wage and overtime regulations of the FLSA, and their employer is not required to pay the employee for overtime hours worked.
The proposed changes
While the proposed rule changes actually touch on several points of the law, the three main things the DOL is seeking to address with this proposal are:
- The salary requirements (salary threshold) employees must meet in order to be considered exempt;
- The total annual compensation requirement to exempt highly compensated employees highly compensated employees
- Implementing a mechanism that would automatically update the salary and compensation thresholds on an annual basis.
The DOL's proposal would raise the salary threshold under which most white collar employees are eligible to receive overtime from $445/week (or $23,669/year) to an estimated $970/week (or $50,440/year). This would more than double the threshold, and result in millions of employees becoming eligible for overtime pay.
The proposal would also increase the total annual compensation exemption requirement for highly compensated employees from $100,000 to $122,148 (the 90th percentile of salaried workers' weekly earnings).
The DOL has also asked for comments on whether changes should be made to the job duties tests employees are required to met in order to be exempt from the overtime regulations. No specific modifications have been proposed as of yet.
The DOL and the White House view the proposed changes as a victory for the American workforce, as only 8 percent of US workers currently earn less than the existing salary threshold of $23,669. If the proposed changes are passed as written, the White House estimates that an additional 4.68 million Americans would become eligible for overtime pay. The DOL is also predicting that the higher salary thresholds for white collar exemptions will simplify the employee classification process for employers, as employers would no longer be required to perform a duties test for employees who fall below the new threshold.
Unsurprisingly, the proposed rule changes have been met with trepidation from the business community and employers.
Should the DOL implement these proposed changes, employers would be required to re-evaluate the exempt status of current employees, revise their overtime policies, inform employees of the changes and possibly look into updating their payroll or time and attendance systems to ensure that they'll be able to accurately and efficiently track the hours of newly non-exempt employees.
While the DOL estimates that the average annualized direct costs for employers would be somewhere between $239 and $255 million, a separate report published by Oxford Economics estimates that the costs for employers would be significantly higher, as much as $874 million in administrative expenditures alone.
Suggestions for employers
While the DOL's proposed changes are still out for public comment until early September, employers should begin looking at how the changes will affect their business sooner, rather than later. Below are a few recommendations on steps employers might want to take:
- Find out how many of your current salary/exempt (remember, a salaried employee isn't necessarily an exempt employee) employees make below the proposed new threshold. Looking at employees who currently make less than $55,000/year will help you anticipate your risk over the next several years.
- Evaluate the job descriptions of all exempt employees to ensure that they comply with current duties tests.
- Review your organization's policies regarding "off the clock" or after-hours work (i.e. reading/responding to emails, etc.).
- Determine whether your business may need to update the system it currently uses to track employees' hours and calculate overtime.
While it is absolutely essential that employers should make themselves aware of the proposed changes and look at how the changes might affect their organization, rushing to change or update policies, job descriptions or salaries at this point would be unwise, as the exact and finalized changes likely won't be released until much later this year.
As a licensed provider of outsourced human resources solutions, G&A Partners acts as an invaluable resource and ally for businesses facing the confusing web of regulatory compliance. G&A Partners’ experienced human resource professionals understand the nuances of all federal and state labor laws, including the FLSA, so they can help companies expertly plan and execute procedural tasks surrounding government compliance. With G&A Partners managing your HR labor law and HR compliance, you can rest assured that your employees are afforded the protection of federal laws, and that you are protected from the risk of human resources noncompliance.
Learn how G&A Partners can help you protect your business and employees through HR labor law and compliance services by contacting us by phone at 1-866-634-6713 to speak with an expert or schedule your free business consultation.
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.