Most employers are aware that certain employees are entitled to be paid overtime at a rate of one and one-half times their wages when the employee works more than forty hours each work week. Those that are not familiar with this general rule will often find themselves in very difficult situations with either the federal or state departments of labor or as defendants in lawsuits brought, either individually or collectively, by employees against them for violating this basic rule.
Certainly, not all employees are entitled to overtime. There are those that are considered “exempt” from overtime requirements. To be exempt, an employee must receive a salary (non-hourly wage or based on piecework) and satisfy the requirements of executive, administrative, or professional duties. This article will not focus on whether an employee is exempt as an executive, administrative or professional, but rather, on the next qualifying factor to be an exempt employee, to wit, the worker must, at a minimum, be paid more than a certain salary threshold which is set by the United States Department of Labor (DOL).
On March 13, 2014, President Obama signed a Presidential Memorandum directing the DOL to update and modernize the regulations defining which white collar workers are protected under the Fair Labor Standards Act’s (FLSA) Minimum Wage and Overtime Standards.
The DOL last updated the White Collar Overtime Regulations in 2004, setting the standard of $455 per week or $23,660 annually for a full-time worker. As such, if an employee made more than $455 per week or $23,660 per year, that employee would not be entitled to overtime provided they were also exempt from overtime requirements based on other grounds. On May 23, 2016, the DOL in its changes to the regulations governing White Collar Exemptions passed its “Final Rule” raising the minimum salary level necessary, in most cases, for an employee to qualify as exempt from overtime under the FLSA.
The salary threshold was doubled to $913 per week or $47,476 per year. According to the U.S. Department of Labor, more than 4.2 million additional white collar employees will become eligible for overtime pay under the new criteria.
The DOL set the salary rate at the 40th percentile of full-time, non-hourly paid employees in the lowest wage census region. Moreover, the minimum salary threshold will automatically increase every three years based on wage growth, with the first automatic increase taking place on January 1, 2020, and, thus, more employees will become exempt as the threshold rises. Not stopping there, the DOL’s rule also updates the salary level for higher-compensated employees, such that employees must receive at least $134,004 per year to be highly compensated. Small businesses are not exempt from the overtime law and all businesses were required to comply by December 1, 2016. However, with the recent decision by a U.S. District judge in Texas and the results of the Presidential election, what will happen in this rule is far less clear than it was a month ago.
Challenges To The Final Rule
On September 20, 2016, two lawsuits were filed in federal court in the Eastern District of Texas challenging the “Final Rule.” In State of Nevada v. U.S. Department of Labor, 16-cv-00731, the plaintiffs contend, inter alia, that the regulation violates the Tenth Amendment and exceeds Congressional authorization. In Plano Chamber of Commerce v. U.S. Department of Labor, 16-cv-00732, more than 50 business groups argue that the new overtime rule’s minimum salary threshold and indexing provision exceeds the DOL’s statutory authority under the FLSA.
The states claim that the overtime rule would force many state and local governments, as well as private businesses, to substantially increase their employment costs. Fearing the “Final Rule” could ultimately force employers to cut services or lay off employees, the plaintiffs are arguing that the new rules unlawfully violate the Tenth Amendment by mandating how state employees are paid. The states also take issue with the policy changes behind the rule saying that workers’ salary level does not reflect the kind of work the employee actually performs. The states argue that the DOL’s regulations disregard the text of the FLSA by imposing a salary threshold without regard to whether an employee is actually performing bona fide executive, administrative or professional duties.
The private plaintiffs, led by more than 50 Texas and national business groups including the U.S. Chamber of Commerce, National Association of Manufacturers, and the National Retail Federation, have argued that the justifications offered by the DOL for the new salary threshold do not constitute a permissible construction of the FLSA. Business trade groups have argued that losing the overtime exemption for “frontline executives, administrative professionals” would cost employers the ability to effectively and flexibly manage their workforces. Their argument is that millions of employees across the country would have to be reclassified from salaried to hourly workers, a move that would impose restrictions on their work hours “that will deny them opportunities for advancement and hinder performance of their jobs–to the detriment of their employers, their customers and their own careers.”
On November 22, 2016, U.S. District Court Judge Mazzant issued a nationwide injunction blocking the DOL from implementing the Final Rule stating the measure improperly created a salary-level test for determining which workers fall under the FLSA’s “white collar” exemption. The court determined that the states were able to show a likelihood of success in their challenge of the rule as well as irreparable harm if it went into effect, and that the DOL failed to show it would be harmed if the rule were delayed.
The primary challenge in the suit was to the DOL’s rule-making authority—in this instance, questioning the DOL’s interpretation of the applicability of the white collar exemption. Judge Mazzant concluded that the DOL, although it enjoyed “significant leeway” to establish the types of duties that might qualify an employee for the white collar exemption, was not entitled to deference in creating the rule because Congress intended the exemption to apply based on the tasks an employee actually performs and did not include a minimum salary level. Judge Mazzant held that “[w]ith the final rule, the Department exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test.”
There is no question that much uncertainty exists as to whether the Final Rule will ever be implemented. Yet, to be forewarned is to be forearmed. Thus, there is no reason for the employer to avoid preparing for all contingencies. The first step for an employer facing the possible application of this new regulation is to assess its workforce and determine how many employees would previously not be entitled to overtime but now will under the new rule. The employer may increase the salary of an employee who would otherwise be exempt to retain that employee’s exempt status. This is not without consequences. Putting aside the increase in costs associated with these higher salaries, this could create upward pressure on the salaries of other employee who are now more closely aligned salary wise.
The employer may also eventually agree to pay employees who were previously deemed exempt as hourly wage employees and pay overtime, if necessary. Now an employer will have additional record keeping duties that did not exist before because, under the law, an employer is required to maintain records of hours worked and wages paid for overtime eligible employees or invite liability. Such employees may be disillusioned by what might seem as demotion. Employees who may once have experienced flexibility in terms of their work hours, now, essentially, “punch a clock.” Moreover, work that they performed before that took more than 40 hours to perform will either continue to be performed by such employee at the overtime rate or may be distributed to those who were kept as exempt keeping overtime costs down but forcing a restructuring of the workplace. Finally, the employer may decide to reduce the amount of pay allocated through base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime hours worked over 40 hours per week to hold the total weekly pay constant-also an undesirable move from an employee morale standpoint.
In light of the fast moving political and legal developments, it is anyone’s guess how this will all play out. Nevertheless, contingencies should be prepared despite the murky wage and hour environment.