Overtime Would Become Available to Millions More Employees Under Proposed Rule

​Millions more workers would be eligible for overtime under a proposed rule released by the U.S. Department of Labor (DOL) on Aug. 30. If the rule is finalized and implemented, overtime protections would be extended to approximately 3.6 million more workers, according to the DOL.

The DOL proposed raising the Fair Labor Standards Act's (FLSA's) annual salary-level threshold to $55,068 from $35,568 for white-collar exemptions to overtime requirements and to $143,988 from $107,432 for highly compensated employees. The department also is proposing automatic hikes every three years to the overtime threshold.

SHRM urged flexibility on the salary-level thresholds and automatic updates. 

‘Substantial Increase’

"The proposed rule contains a very substantial increase in the minimum salary threshold for white-collar exemptions, moving the weekly amount from $684 to $1,059, or the annual amount from $35,568 to $55,068. While this jump is not quite as large as the increase that the Obama administration attempted in 2016—moving from $455 to $913 per week, or from $23,660 to $47,476 annually—it is still very significant," said Brett Coburn, an attorney with Alston & Bird in Atlanta.

The sizable hike means that, if the rule goes into effect as proposed, employers may have many employees whose salary falls between the current threshold and the proposed new threshold, Coburn noted. Employers "will have to decide whether to increase the salaries for those employees to get them up over the new salary threshold, or to convert the employees to nonexempt and start paying them overtime," he said.

In addition to being a costly proposed rule for businesses, there might be nonmonetary impacts on employees whose salary is between the current threshold and the proposed new one.

"In my experience, a lot of employers get pushback from employees when they are told they are being converted from a salaried role to an hourly role, because employees take pride in being salaried and not having to punch a clock," Coburn said.

Thus, there may be a big adjustment for employees and employers in terms of timekeeping practices, he said.

In light of the successful challenge of the overtime rule in 2016, employers should "proceed with caution in terms of actual rollout or implementation, and they should prepare for uncertainty," Coburn said, adding that the final rule likely will be challenged in court once it is issued. Employers nonetheless should start preparing their plans now for how to comply should the proposed rule be finalized and survive any legal challenge, he recommended.

As with the current overtime rule, under the proposed rule highly compensated employees do not have to meet the standard duties tests to be exempt, so long as they meet a minimal duties test. The highly compensated employee test "is based on the rationale that employees who earn at least a certain amount annually—an amount substantially higher than the annual equivalent of the weekly standard salary level—will almost invariably pass the standard duties test," the DOL noted. The need for a detailed duties analysis is thus eliminated for highly compensated employees. The highly compensated employee test applies only to employees whose primary duty includes performing office or nonmanual work, the DOL added.

Proposed Rule’s Impact

The proposed rule will have a significant impact on small employers, nonprofits and entire industries such as hospitality, retail and health care, said Lee Schreter, an attorney with Littler in Atlanta.

Small and midsize businesses could face substantial increases in labor costs if they have to pay larger salaries or reclassify employees as eligible for overtime, said Patrick Dalin, an attorney with Fisher Phillips in Philadelphia. Many large employers would also need to undertake costly and time-consuming reviews of their exempt workforce as a result of the rule, he added.

In addition, Schreter said the proposed salary levels, if implemented, would have a disproportionate impact on employers located outside large metropolitan areas.

The automatic increase is similar to what the Obama DOL unsuccessfully attempted in 2016, said James Coleman, an attorney with Constangy, Brooks, Smith & Prophete in Fairfax, Va.

Fresh Look

Employers might use this proposed rule as an opportunity to take a fresh look at their exemption determinations more broadly, Coburn said.

While the proposed rule does not change anything about the duties tests for the various exemptions, the fact that there is a potential change in the regulations could provide some cover for employers who might need to reclassify employees whose duties do not meet the requirements to be exempt. 

Just because someone is given a job title such as restaurant manager and has a job description that describes exempt duties doesn't mean they are exempt from the FLSA's overtime requirements, cautioned Lee Tankle, an attorney with Ogletree Deakins in Philadelphia.

"Employers need to be aware that it is not just about the salary level in order to qualify for an exemption. The salary level threshold is the floor. What is more important—and usually more difficult to discern—is whether that manager is performing primarily executive, administrative or professional [EAP] duties," Tankle said. If yes and they earn the minimum salary threshold, then they will be exempt. If not, further analysis is needed.

The DOL suggested that should its salary-level approach not survive judicial scrutiny or otherwise not be a determinative factor in one's exempt status, it might revisit the duties test, said Robert Boonin, an attorney with Dykema in Ann Arbor, Mich. "That outcome would likely cause considerable havoc," he noted.

In frequently asked questions on the proposed rule, the DOL said, "As long as it is paired with an appropriate salary-level requirement, the standard duties test can appropriately distinguish bona fide EAP employees from nonexempt workers."

Regardless of the fate and timing of the final rule, employers must remain mindful of states with overtime laws that already require higher salary levels to qualify for certain exemptions, said Russell Bruch, an attorney with Morgan Lewis in Washington, D.C. "Some states increase these exemptions every year, and employers must simultaneously comply with these state exemptions and with whatever federal minimum is implemented," he added.

State overtime salary thresholds are higher than the current federal level in California, Colorado, Maine, New York and Washington, according to the Maine Motor Transport Association.