Written by Jillian Collins
Last week, President Obama ordered U.S. Department of Labor Secretary Tom Perez to update the existing federal regulations on overtime, the effect of which could allow millions of workers to qualify for time and half pay for the first time.
The Fair Labor Standards Act generally requires most employers to pay certain employees at least the federal minimum wage (currently $7.25/hour) and overtime at a rate of at least 1.5 times the employee’s regular pay rate for hours over 40 in a week. The FLSA does include various exemptions however; and at issue most of the time is whether the employee is exempt under the FLSA’s executive, administrative or professional exemptions. Generally, to qualify for these exemptions – often referred to as the “White Collar” exemptions, the employee must receive a certain minimum salary per week (the Salary Basis test) and perform certain executive, administrative or professional job duties (the Job Duties test). DOL regulations set forth these tests in great detail. It is these exemptions that President Obama is focused on because they capture millions of workers who he believes the FLSA and its interpreting regulations never intended to capture in this modern economy.
Notably, President Obama does not need Congressional participation to change the eligibility for overtime because the FLSA itself does not define the White Collar exemptions, but instead provides the DOL with broad authority to do that. Other Presidents, including President Bush in 2004, took a similar tact. In this case, the reason is not surprising – congressional gridlock has tabled just about all of President Obama’s employment-related legislation efforts. This announcement comes on the heels of President Obama’s executive order increasing the minimum wage for workers under new federal contracts to $10.10 an hour from $7.25 and following years of increased scrutiny on exempt employee classification by DOL’s Wage and Hour Division.
President Obama has instructed the Labor Secretary to modernize and streamline the existing overtime regulations and to do so in a way that is consistent with the FLSA’s intent, the changing nature of the workplace and which will allow both workers and business to better understand and apply the exemptions.
More specifically, we would expect any proposed revisions to the regulations to increase the weekly salary threshold. The current minimum of $455/week covers workers earning as little as $24,000 a year, an amount that is below the poverty line for a worker supporting a family of four. The White House has noted that only 12% of salaried workers fall below this threshold, a drop from 18% in 2004 and 65% in 1975. The changes should come as no surprise to New York and California employers who are already subject to higher state law overtime salary thresholds that are set to increase in the coming years. New York’s current threshold is $600/week and will increase to $656.25/week in 2015 and $675.00/week in 2016. California requires employers to pay a salary at least twice the minimum wage on a weekly basis, which currently equates to $720/week and will increase to $800 in 2016 when the minimum wage increases to $10/hour. The President did not give the DOL any specific guidance on the amount the weekly threshold should be increased, but any increase could immediately impact the service, retail and food industries where there are a number of low-level supervisors. If the threshold was updated merely to keep pace with inflation, then 3.1 million workers would become overtime eligible immediately.
While this is the only change that administration officials have discussed publicly, we expect the proposed changes to be much broader, including by narrowing the job duties test. We will be closely monitoring these proposed changes as they are released in the coming months and will update our analysis accordingly.