Last week, the U.S. Department of Labor announced a historic regulation that will expand overtime protection to about 5 million American workers who currently don’t have it. An additional 10 million salaried workers who should already receive overtime pay under the current regulations (but often don’t) will have their existing right to receive overtime pay made clear and unambiguous.
Specifically, the Department of Labor is proposing to raise the minimum salary level needed to “exempt” a salaried employee from the federal overtime requirement up from the current $455 per week threshold (just $23,660 per year) to about $970 per week ($50,440 annually) when the rule takes effect. In other words, salaried workers earning below that $50,440 threshold will be automatically entitled to overtime pay, regardless of their job duties. Moreover, and for the first time in history, this salary threshold will be automatically updated on an annual basis to keep pace with changes in the economy.
This proposed regulation is expected to receive fierce opposition from business groups and lobbyists from the restaurant and retail industries, so public participation in the rulemaking process will be critical, just as it was in the FCC’s successful effort to implement net neutrality. Here’s a brief overview of the current federal law on overtime, a description of the Department’s proposed regulation, and information about how to comment on the proposal.
Current Federal Law on Overtime
The Fair Labor Standards Act (FLSA) generally requires that employees covered by the Act must receive the federal minimum wage (currently $7.25 per hour) and overtime pay at a rate of not less than 1.5 times their regular rate of pay for all hours worked over 40 in any workweek. While these basic wage and hour protections extend to most workers, the FLSA does provide a number of important statutory exemptions, including exemptions from the minimum wage and overtime requirements for “executive,” “administrative,” and “professional” employees. The definitions and scope of these so-called “white collar” exemptions are defined by the Department of Labor’s regulations at 29 CFR Part 541.
Since 1940, the Department’s regulations have generally required each of the following three tests to be met for one of the FLSA’s “white collar” exemptions to apply:
- the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
- the amount of salary paid must meet a minimum specified amount (the “salary level test,” currently $455 per week); and
- the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).
Contrary to a popular misconception, the mere fact that an employee is paid a salary is not alone sufficient to exempt them from overtime; the employee must also earn a sufficient amount of money and primarily perform the duties of an exempt executive, administrative, or professional employee to qualify for exemption. Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.
The Need to Raise the FLSA Salary Level Test
Although receiving a sufficient salary is only part of the criteria needed to qualify an employee for exemption, the Department of Labor has long recognized the salary level requirement as the simplest and most objective method for determining whether a worker is entitled to overtime pay. If left at the same amount over time, however, the effectiveness of the salary level test as a means of quickly identifying the workers Congress intended to receive overtime diminishes as the wages of all workers rise due to inflation.
Here, the current salary level threshold for exemption of $455 per week, or $23,660 per year, has fallen below the federal poverty threshold for a family of four ($24,008 per year). According to the latest earnings data, only 8 percent of full-time salaried workers earn less than $455 per week. When considered in tandem with the Bush administration’s introduction of more lenient duty requirements to qualify for the “white collar” exemptions in 2004, the current $455 standard salary level clearly fails to serve as a meaningful line of demarcation between salaried workers who should receive overtime and those who should not.
As a consequence of today’s inadequately low salary level threshold, more salaried workers primarily performing non-exempt duties (e.g., stocking shelves, working cash registers, filling out spreadsheets, handling paperwork, etc.) are vulnerable to being misclassified as “exempt” from overtime. Much of this misclassification stems from the widespread misbelief that all salaried workers earning above the salary threshold are automatically ineligible for overtime pay (e.g., as erroneously reported in recent days by The Atlantic, CBS, Forbes, Fortune, Fox Business, Fox News, etc.).
Whether accidental or deliberate, misclassification results in wage theft from workers wrongly denied overtime pay and costly litigation for their employers. A recent GAO report, for example, showed that the annual number of FLSA lawsuits filed in federal courts has roughly quadrupled over the past decade, with a number of stakeholders identified ambiguity in the application of “white collar” exemptions as a prime culprit. Even business groups like the U.S. Chamber of Commerce would likely concede that the current $455 per week salary level test needs to be increased to prevent misclassification, notwithstanding their reluctance to publicly “negotiat[e] the threshold in the press.”
Employees who actually do qualify as an exempt “executive,” “administrative,” or “professional” employee under the current regulations also suffer from a low salary threshold. Considering their long hours, many low-salaried frontline managers in retail or restaurant establishments earn less per hour than the hourly employees they supervise. In rare instances, exempt employees can even earn less than the federal minimum wage. For example, an exempt “assistant manager” with a $24,000 annual salary earns below the $7.25 minimum wage if he or she works 64 or more hours in a week. Congress clearly did not intend to countenance such exploitative labor practices when it drafted “white collar” exemptions for a class of workers they presumed to be well-compensated.
The Need to Index the FLSA Salary Level Test
In rejecting an earlier request to index the salary level test, the Department of Labor under George W. Bush instead promised to manually update the salary level through regulations on a more frequent basis. 69 FR 22171 (2004). However, the salary level test has only been updated once in the past 40 years, and has gone nine or more years between updates on several occasions. This history underscores the difficulty in maintaining an up-to-date and effective salary level test through ad hoc agency rulemaking. Automatically updating the salary level on an annual basis would ensure that it continues to serve as a reliable test for quickly identifying white collar workers entitled to overtime, while also eliminating the costs and uncertainties associated with raising the salary level test by larger amounts in irregular intervals.
Key Provisions of the Proposed Regulation
The Department’s proposed rule focuses primarily on updating the salary and compensation levels needed to qualify certain white collar workers for exemption. Specifically, the Department proposes to:
- set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers (about $970 per week, or $50,440 annually, by the Final Rule); and
- establish a mechanism for automatically updating the salary level going forward to ensure that they will continue to provide a useful and effective test for exemption.
The Department is considering two alternative methodologies for annually updating the salary threshold going forward. One method would update the thresholds by ensuring that they remain at the same fixed percentile (i.e., the 40th percentile) of earnings for full-time salaried workers. The other method would update the thresholds based on changes in inflation, as measured by the CPI-U. Both methods are described in detail in the NPRM and the Department seeks comments on which methodology would be more appropriate for implementing automatic updates to the salary level threshold going forward. Assuming economic growth remains at its current pace, differences between the two methodologies are expected to be negligible. 80 FR 38540.
The Department is not proposing any changes to the lenient duty requirements the Bush administration adopted in 2004, but hinted in its NPRM that a salary level below the 40th percentile of full-time salaried worker earnings might necessitate “a return to the more detailed long duties test” that previously governed the overtime exemptions. 80 FR 38558-59. Such duty requirements could include, for example, specific limits on the amount of manual or administrative support work an exempt employee could perform before losing his or her exempt status.
Why $50,000 Per Year is an Appropriate Baseline for the Salary Level
The Department is proposing the set the salary level at the 40th percentile of weekly earnings for full-time salaried workers, as reported by the Bureau of Labor Statistics (BLS). If the Department sticks with the 40th percentile methodology in its Final Rule, this would likely amount to a weekly salary level of $970 per week ($50,440 per year).
This proposed amount is historically consistent with the higher salary levels the Department of Labor used to pair with lenient “short duties tests,” which the Bush administration adopted as the exclusive “standard duties tests” in 2004. See 69 FR 22192-93 (2004) (dismissing differences between the current duties tests and the former short duties tests as “de minimis”). Because the short duties test was only introduced as an alternative to the more demanding “long duties test” for salaried workers whose pay was high enough to practically guarantee exempt status, the short test salary level was always set significantly higher than the long test salary level:
Historical Salary Level Amounts
(Nominal)
And here are the historical salary level amounts adjusted for inflation, converted to their equivalent in 2015 dollars:
Historical Salary Level Amounts
(Adjusted for Inflation)
As the tables above indicate, the Department’s proposed salary level (about $970 per week, or $50,440 annually) is slightly lower than the short test salary levels that existed before 2004. By contrast, the $455 per week salary level set in 2004 was
extremely low by historical standards, even when compared against the lower salary levels associated with the more rigorous long duties tests. Essentially, the Bush administration’s 2004 rulemaking dramatically expanded the scope of the white collar exemptions by pairing the lower salary level of the “long” duties tests with the lenient job duty requirements of the “short” duties tests. President Obama’s rulemaking corrects for that anomalous mismatch by restoring a salary level more appropriate level for the lenient duty requirements in effect.
80 FR 38528-33.
Number of Workers Potentially Affected by the Department’s Proposed Rule
The Department estimates that about 5 million currently exempt workers who earn at least the current weekly salary level of $455 but less than the 40th earnings percentile (about $970 per week) would, without some intervening action by their employers, become newly entitled to minimum wage and overtime protection under the proposal. 80 FR 38564.
The proposed rule would also strengthen existing overtime protections for an additional 10 million salaried workers who currently earn a salary between $455 per week and the proposed salary level of $970 per week. 80 FR 38578. This includes 6.3 million white collar workers (currently entitled to overtime because they do not satisfy the applicable duties tests) and 3.7 million workers in blue collar occupations. The existing overtime rights of these 10 million workers would be strengthened because their non-exempt status would be clear based on their salaries alone, thus dramatically reducing the risk of being misclassified as “exempt” merely due to their salaries.
Estimated Economic Impact of the Department’s Proposed Rule
Predictably, representatives from the business community allege that the Department’s proposed overtime rule will have calamitous negative consequences on the economy. These claims should be viewed skeptically, however, given the number of ways employers may respond and treat their employees newly entitled to overtime pay as a result of the rule.
For employees making slightly less than the new salary level threshold (e.g., between $48,000 and $50,000 per year), it might be simplest to give those employees a small raise to keep them exempt. For employees who never (or only rarely) work overtime, it might make sense to pay the time-and-a-half overtime premium when necessary. Ideally, employers could simply reduce work hours and spread them around by hiring or promoting other employees. For this reason, even the Department’s harshest critics concede that, if anything, the proposed rule will likely result in a net creation of jobs. The National Retail Federation, for example, recently published its own study speculating on the effects of increasing the salary threshold required for exemption, and concluded the following:
Despite the effort to control costs, we do not expect the new rules to trigger job losses. In fact, as some workers see their hours reduced . . . some companies will likely need to hire new, part-time workers.
As some critics have pointed out, however, employers could also respond to new overtime requirements by reducing the base salaries or wages of any workers newly entitled to overtime in an attempt to offset expected overtime costs (provided that the worker’s hourly rate would not drop below the $7.25 federal minimum wage). Fortunately, there are a number of practical reasons why this would not happen in most instances. Employers may be constrained by a high demand for labor, employee bargaining power, concern about reductions in worker morale or productivity, or jealousies involving the disparate treatment of employees performing similar tasks who work different hours. Academics who have studied the issue have found that some reduction in base wages occurs after laws expanding overtime protection, but, for a variety of reasons, those reductions are much less than would be expected in a perfectly elastic labor market.
Making realistic estimates about likely employer responses to the 5 million workers newly entitled to overtime, the Department of Labor estimated that its proposed rule would result in economic transfers amounting to about $1.4 billion per year from employers to their employees. 80 FR 38567. This income transfer to low- and middle-class workers – and the stimulating multiplier effect it would likely have on the broader economy – vastly outweigh the estimated cost to employers, who have been enjoying tremendous profits and gains in worker productivity in recent decades while keeping worker wages stagnant.
The Department of Labor did not attempt to quantify many of the likely benefits of its proposed rule – e.g., new jobs, an increase in consumer spending, reduced litigation over misclassification, improvements to employee health and productivity, etc. – so public comment on these benefits would be especially helpful.
Why Public Support Is Needed
As observers have pointed out, this overtime regulation does not require Congressional cooperation and there is little that the current Congress can do to stop it. The FLSA statute itself specifically delegated the Department of Labor with the rulemaking authority to “define and delimit” the scope of the FLSA’s white collar exemptions.
Unfortunately, that’s not necessarily the end of the story. Given the import of this rulemaking, opponents in the business community will almost certainly attempt to prevent or delay its implementation through litigation, hoping to at least “run out the clock” for the remainder of Obama’s presidency. This strategy becomes legally and politically difficult, however, if the proposed rule enjoys overwhelming support from the general public – especially with a Final Rule expected to come just as the 2016 election heats up.
How to Submit a Comment
The easiest way to comment on the Department’s proposed rule is to visit the following link on regulations.gov:
http://www.regulations.gov/...
Comments are due by 11:59 pm on September 4, 2015. Additional information about the proposed rule (FAQs, a Fact Sheet, the NPRM itself, etc.) is available here on the Department of Labor’s website.