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Overtime rules: Changes on the way, but specifics scarce

Secretary of Labor Tom Perez has his orders. President Barack Obama on March 13 officially directed him to “modernize and streamline the existing overtime regulations.” The president’s directions further instruct the Department of Labor (DOL) to “address the changing nature of the workplace” and simplify the rules so that they will be “easier for both workers and businesses to understand and apply.” 

The process of changing regulations is time-consuming and will involve the issuance of a notice of proposed rulemaking, a comment period, and hearings where various stakeholders will get the chance to influence changes to the rules. All that must take place before a final rule will be unveiled. Then after the months required to hash out the revisions, the matter still may not be settled because an interested party may find grounds for a lawsuit.

So what lies ahead for employers and what should they expect to come out of the effort to make more workers eligible for overtime?

Changes to white-collar exemptions

The president has made it clear he wants fewer workers eligible for the “white-collar” exemption that prevents them from collecting 1½ times their regular pay rate for hours worked over 40 in a workweek.

After a signing ceremony, Obama sent Perez a presidential memorandum detailing problems he sees in the current regulations. In the memorandum, Obama says that many exempt workers–particularly those classified as executive, administrative, and professional–are suffering because of problems with the regulations. The “outdated” regulations mean that “millions of Americans lack the protections of overtime and even the right to the minimum wage,” the memorandum states.

Currently, the minimum an exempt worker can make is $455 per week. A White House fact sheet says that threshold “has failed to keep up with inflation, only being updated twice in the last 40 years.” The $455 threshold was set in 2004. Before being raised to $455, the minimum was $250 a week, which was set in 1975.

Just how much higher a proposed new minimum level will be isn’t specified in the memorandum Obama sent to Perez, but Kevin McCormick, chair of the labor and employment section of Baltimore law firm Whiteford, Taylor & Preston and editor of Maryland Employment Law Letter, says some are saying it could be at least doubled and maybe reach $1,000 a week. “There’s no doubt that the $455 is going to be history,” McCormick says.

In addition to tweaking the salary threshold, McCormick says he expects new proposed regulations to address the kinds of employees who can be exempt. The $455 minimum threshold refers to the “salary basis” test, but the “duties test” also is likely to change, and McCormick expects any new regulations to remove some flexibility employers currently have.

As a practical matter, exempt managerial employees sometimes do the same work as hourly nonexempt employees. For example, McCormick says management employees in restaurants often pitch in to wait tables during peak hours but they can still be exempt because management is their primary duty. Currently, he says, there’s some latitude for managers who sometimes need to do the same kind of work as hourly employees because of the “rule of thumb” that says a manager’s work must be at least 50 percent managerial.

McCormick says the DOL may try to come up with hard percentages or job classifications to determine which employees can be exempt. “The more you drill down and make the regulations precise, the more places you’ll have that don’t fit the categories,” he said.

The DOL may develop a less flexible definition of what positions will be allowed to be exempt and if the job doesn’t fit the simpler analysis, then it won’t be allowed to be exempt. “Ultimately, when regulations come out, employers will have to assess where they are,” McCormick says.

Perez supports change

After Obama signed a presidential memorandum directing the DOL to develop revisions to the Fair Labor Standards Act (FLSA) regulations, Perez voiced his support in a blog post on the DOL website. He wrote that the FLSA’s minimum wage and overtime protections were intended to apply to more workers than they currently do.

“The law provides for some exceptions, but the exceptions haven’t kept up with our modern economy,” Perez wrote. “These exceptions were originally designed to only apply to well-compensated employees with greater job security, more bargaining power, and higher potential for promotion.”

Perez cited examples of two New Jersey gas station managers the DOL’s Wage and Hour Division became aware of. He said the two workers typically each worked 65 hours a week, but “their salary was so low that they weren’t even making the equivalent of the minimum wage.”

Perez wrote that the $455 threshold “is capturing employees who just don’t make that much,” and it affects many kinds of workers, such as the New Jersey gas station managers and retail, fast food, and janitorial workers.

“By updating who qualifies for overtime pay, we are expanding opportunity and making sure hard work pays,” Perez wrote.