By: Ashley Verdon and Neil Eddington
September 30, 2016
With a regulation sure to invite both praise and condemnation, the Obama Administration announced new salary thresholds for the Fair Labor Standard Act’s (“FLSA”) overtime exemptions. The new thresholds will bring overtime eligibility to millions of previously-exempted white collar workers. Under the new guidelines, executive, administrative, and professional employees earning $47,476 per year or less will be entitled to overtime pay, doubling the previous federal threshold of $23,660.
Since 1938, the FLSA has permitted the exemption of “any employee employed in a bona fide executive, administrative, or professional capacity” (29 U.S.C. §213), more commonly known as the “white collar exemption.” Under the statute:
- A bona fide executive employee is one whose primary duty is in management of the company or one of its departments, and who regularly directs the work of two or more other employees and may hire, fire, or provide input into the same for other employees (29 C.F.R. §541.100);
- An administrative employee is one whose primary duty is the performance of office or non-manual work directly related to the management or general business operations (29 C.F.R. §541.200);
- A professional employee is one whose primary duty is performing work requiring either knowledge in a field of science or learning usually acquired through extensive specialized intellectual instruction, or invention, originality, or talent in a recognized field of artistic or creative endeavor (29 C.F.R. §541.300).
If an employee meets anyone of the foregoing definitions, while also earning less than the amount designated by the salary threshold, he or she is entitled to overtime pay.
Starting December 1, 2016, the salary threshold will increase to $47,476 and update every three years by indexing the figure to salary growth in the lowest income region of the country. The new regulation will also allow employers to apply bonus or incentive compensation towards 10% of an employee’s salary level. Forecasting how the new rules will affect workers is complex. On one hand, the Labor Department estimates 4.2 million workers will qualify for overtime and wages will increase $12 billion in the next decade. However, employers and industry groups argue the rule will force them to cut hours, decrease hiring, and reduce the number of salaried workers. Goldman Sachs estimates 120,000 new jobs will be created, yet, they will mostly be lower-wage hourly positions. (Melanie Trottman and Eric Morath, Obama Administration Extends Overtime Pay to Millions, WALL STREET JOURNAL, May 17, 2016.)
Still, the Obama Administration appears undeterred. Vice President Biden framed employer criticisms as a win-win for employees: they are either paid more or have more time to raise their families or go to school. Id. There are other signs indicating the Administration will hold steadfast in support of the new rules. Notably, the original proposal called for an increase to $50,440 suggesting the $47,476 figure – notwithstanding the significant hike it poses from the existing threshold – reflects a compromise. Id. It is unlikely the Labor Department will agree to a figure below $47,476.
Historically, increasing the overtime exemption salary level has been a contentious issue; proposed rules have fallen victim to deadlock and rules changes have been controversial since the Carter Administration. Id. Given that the new guidelines are not guaranteed to be adopted, however, employers should still review the white collar definitions, their employees’ duties, and their employees’ salary levels to determine and prepare for how they might be affected. In some instances, employers may save money by raising salaries above the threshold if those raises are less than the amount an employee would receive through overtime pay under the new rules. In others, employers may be better off transferring salaried workers to a wage pay schedule. Employers may also consider increased salaries in the place of bonus pay to avoid uncertainty regarding an employee’s exemption status.
December 1st marks a significant change to the FLSA overtime exemption rules, however, the above suggestions show there are multiple ways that employers can prepare for the new rules.