Proposed DOL Changes May Set the Stage for Overtime Shift with Salaried Employees
Published by Eric A. Welter on July 27, 2015
New regulations pertaining to overtime pay proposed by the Obama administration may force many employers to correct a longstanding assumption about employee classification, particularly as they come to terms with changes that will significantly expand employee eligibility for overtime pay. For years, American employers have equated the word “overtime” with “hourly employee”. As a result, […]
New regulations pertaining to overtime pay proposed by the Obama administration may force many employers to correct a longstanding assumption about employee classification, particularly as they come to terms with changes that will significantly expand employee eligibility for overtime pay.
For years, American employers have equated the word “overtime” with “hourly employee”. As a result, employers have generally assumed the opposite to also be true, namely that “no overtime” is equated with “salaried employee” as well. In summary, the common rule of thumb was that hourly employees were eligible for overtime pay, and that salaried employees were not, in simple terms.
In reality, the Fair Labor Standards Act (FLSA) examines far more than just an employee’s form of compensation to identify eligibility for overtime pay.
The FLSA uses the terms “exempt employee” and “non-exempt employee” specifically to classify personnel as regards their eligibility for overtime pay. Under the FLSA, the exemption test considers the following factors:
1. Form of Compensation – Every employee who is compensated using hourly pay is automatically eligible for overtime under the law.
2. Level of Compensation – Under the FLSA presently, any salaried employee who makes $455 per week ($23,660 per year) or less is also eligible for overtime pay. This is true regardless of the nature of their duties.
3. Nature of Duties – In addition, salaried employees who make more than $455 per week ($23,660 per year) may still be eligible for overtime pay, based upon the nature of their job duties. This is called the ‘duties test’.
The reason that so many employers have equated exempt with salaried pay and non-exempt with hourly pay is primarily due to the FLSA provision that lists many common white-collar positions as exempt from the overtime requirement.
These administrative, executive and professional positions include many office jobs as well as specific positions in computer and network administration and outside sales. There is also an exemption in the FLSA for some retail and service management positions.
However, many employers are simply not aware either that there is a compensation threshold that applies to employee classification, or that some salaried employees are also eligible for overtime based upon the nature of their duties.
The increasingly blurred lines in terms of job duties and level of compensation between historically ‘blue collar’ and ‘white collar’ jobs has further complicated the common understanding of overtime pay.
For example, it is not uncommon in the retail sector for some store managers to make a salary that classifies them as exempt, but which results in a level of total take-home pay equal to or even lower than the take-home pay that the hourly employees they supervise may average, when overtime pay for the hourly workers (and additional uncompensated work time required of the manager) is also taken into account.
In response to this, the Obama administration has issued a Notice of Proposed Rulemaking (NPRM) through the U.S. Department of Labor that would raise the overtime salary threshold to as much as $50,400. Part of the reason for the literal doubling of the proposed threshold is that the mandated salary level is not tied to inflation, and had not been previously updated to do so. The new proposed rule would index future adjustments of the salary threshold to inflation to account for this.
While the rule is proposed and would not likely go into effect until 2016, the NPRM process is akin to an executive order and does not require submission of the change to Congress for approval. Therefore, there is a strong likelihood that it will be instituted as law.
Employers should take particular note of this statement from the Department of Labor’s FAQ page about the proposed rule:
“Job titles do not determine exempt status, and the fact that a white collar employee is paid on a salary basis does not alone provide sufficient ground to exempt that employee from the FLSA’s minimum wage and overtime requirements. For an exemption to apply, an employee’s specific job duties and salary must meet all of the applicable requirements provided in the Department’s regulations.”
While the proposed rule does not fundamentally alter the Department of Labor’s standards for employee classification or determining overtime eligibility, the dramatic increase in the salary threshold effectively repositions a sizable portion of the salaried workforce as being overtime-eligible.
Employers would do well to audit their current positions, compensation and employee classifications and also ensure that proper mechanisms are in place for tracking of employee time worked and overtime pay for now and the future.Topics: Department of Labor, DOL, Employee Classification, FLSA/Overtime, Notice of Proposed Rulemaking, NPRM, Obama Administration, Overtime, Wage and Hour