Get Ready to Reclassify Workers Under Forthcoming FLSA Regs

Prepare for the likely consequences of narrowing exempt status

By Stephen Miller, CEBS Mar 24, 2015
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Update: Final Overtime Rule Takes Effect Dec. 1, 2016

The Department of Labor’s final rule revising the Fair Labor Standards Act overtime regulations was released on May 18, 2016. The new rules take effect on Dec. 1, 2016.

Under the final rule:

• The annual salary threshold for exempt positions will jump from $23,660 to $47,476 (or from $455 to $913 per week) , and will be updated every three years. That’s less than the proposed rule’s $50,440 annual amount, but more than double the old threshold.

• There will be no change in the duties test used to determine whether employees earning more than the salary threshold must be classified as nonexempt from overtime, including the exemptions for executive, administrative and professional positions, among others.

• For highly compensated employees (HCEs), who may generally be considered exempt without regard to the duties test, the final rule raises the annual HCE salary threshold from $100,000 to $134,004.

(See SHRM Online’s FLSA Overtime Rule Resources page.)

The U.S. Department of Labor (DOL) will soon unveil its proposal to dramatically limit job positions that can be classified as exempt from overtime under the Fair Labor Standards Act (FLSA), advised Tammy McCutchen, former administrator of the DOL's Wage and Hour Division under President George W. Bush and an employment attorney with Littler.

McCutchen spoke at the Society for Human Resource Management's 2015 Employment Law & Legislative Conference, held in Washington, D.C., in March. She recalled that a year earlier President Barack Obama had declared that “Americans have spent too long working more and getting less in return,” and ordered Secretary of Labor Thomas Perez to revise federal FLSA regulations so as to narrow the availability of exempt status, requiring that millions more employees be paid hourly and receive at least one and one-half times their regular rate of pay after 40 hours of work per workweek.

Likely Revisions

After the proposed rule to revise the FLSA regulations is issued this summer, a subsequent final rule will take effect in 2016, before the end of the Obama administration.

The proposed regulations are widely expected to target the white-collar exemptions for executive, administrative, professional, computer and outside sales employees, and to revise the tests used to determine exempt status.

Salary-level test. When the FLSA was passed in 1938, for instance, the salary level test established a salary threshold of $30 per week; workers earning that amount or higher and who met the criteria for white-collar exemptions could be classified as exempt from overtime. By 2004, the salary threshold had risen to its current level of at least $455 per week (rounded to at least $23,660 annually).

The proposed upward revision in the threshold amount under the forthcoming regulations, insiders have indicated, will likely be pegged to an annual salary of between $42,000 to $50,000, McCutchen said.

"The union-supported Economic Policy Institute has been advocating a threshold of $984 per week," which would be above $51,000 annually, she pointed out. And more than 30 Democratic members of Congress have urged President Obama to "be bold" by setting the annual threshold as high as $69,000.

McCutchen said a more reasonable increase would be "a level in the low- to mid-$30,000 range," which, in her view, "could work even in lower cost-of-living areas, such as the rural South." The rules "should not be written for New York City or San Francisco" since they are applied nationally, she said.

Job duties test. Currently, a worker's primary duties are determined by emphasizing the character of the job as a whole, McCutchen noted. Time spent on exempt duties, which typically require discretion and independent judgment, has been viewed as a "useful guide" but "does not determine exempt status, except in California."

Under the upcoming regulations, "expect the adoption of California's requirement that more than 50 percent of an employee's time must be spent on overtime-exempt duties each week for the position to be classifiable as exempt," said McCutchen. While the DOL views adoption of a percentage threshold as a way to reduce ambiguity, in practice this could mean "conducting a time study for every employee."

Eliminating the concurrent duties exemption would particularly affect employees whose primary duty is to manage a small enterprise or a subdivision of a larger enterprise while also undertaking nonexempt tasks.

Possible Consequences

"If the regs include a $50,000 salary level threshold plus a 50 percent primary duties test, the result may be to strictly curtail those who supervise and simultaneously perform other work," McCutchen feared. For instance, it could mean "ordering exempts to stay away from the copier," lest they spend too much time on nonexempt duties. Assistant managers who also work a cash register when customer lines are long could be required to stand by and be idle rather than risk performing nonexempt duties, "and they shouldn't even think about helping out with inventory," she cautioned.

Another possible consequence would be to "send litigation into overdrive, as in California, where employers who are sued face tremendous pressure to settle and reclassify," McCutchen said. Many employers will find it easier to "go nonexempt" and pay overtime to nearly their entire workforce, she predicted.

In McCutchen's view, the administration fails to understand that "it's still the same pot of money that's available to compensate the employee," whether a worker is classified as exempt or nonexempt. So if overtime pay is required, a likely result will be to strictly limit overtime hours worked, despite the adverse effect on productivity, rather than—as the administration expects—to increase the employee's annual compensation.

While many non-executive employees view themselves as professionals and react negatively when shifted to hourly compensation, "the DOL wants nearly everyone to be nonexempt, and to sign in and clock out as do unionized workers," McCutchen contended. "They don't believe that some employees prefer to be salaried, with guaranteed pay and the flexibility to adjust when they do their work."

Look Back: In Illinois Senate, Obama Opposed 2004 FLSA Revisions

In 2004 Tammy McCutchen, then serving as administrator of the Wage and Hour Division under President George W. Bush, led the effort to update and overhaul FLSA regulations, intended to better meet the needs of the contemporary workplace. Enacted in 1938, many job classifications requiring overtime pay under the statute had not been revised since the New Deal era. The new regulations took effect nationally that year—but not in Illinois. There, state Sen. Barack Obama sponsored legislation that blocked the implementation of the new overtime rules, winning support from labor advocates that helped propel his national ascent within the Democratic party.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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