DOL takes aim at white-collar overtime exemption

For more than 12 months now, the employer community has been on the lookout for a regulatory proposal that could fundamentally change the application of the most-used exemption from minimum wage and overtime — the Part 541/white-collar exemption. Increased salary obligations, a heightened requirement to establish an exempt employee’s primary duty, and a number of other changes have been rumored.

Earlier this year marked the one-year anniversary of the “Part 541 Watch,” a watch that largely had been met with silence. Just over one year ago, President Obama signed a Presidential Memorandum directing the Secretary of Labor to “restore the common sense principles” related to overtime. More recently, the Department of Labor submitted its proposed rule to OMB for review, according to a blog post by Secretary of Labor Thomas Perez. Typically, OMB review takes 30 to 60 days (or longer). While at OMB, the public has no details on the particulars. The specific provisions only will be revealed once the proposed rule clears OMB review and is published in the Federal Register.

Anticipated changes

The President’s specific directive to the Secretary was to consider how the regulations could be revised to update existing protections in keeping with the intention of the Fair Labor Standards Act; address the changing nature of the American workplace; and simplify the overtime rules to make them easier for both workers and businesses to understand and apply.

To that end, in May 2014, in the Regulatory Agenda, the Department announced a target date of November 2014 for publication of a proposed rule on revisions to the Part 541 regulations. In the months that followed, the Department engaged in a series of “listening sessions” with the regulated community — both employers and employees — during which the Department solicited input and ideas. During those meetings, the Department was focused on the requisite salary level and changes to the primary duty test. Based on all of the available information, it appears that the Department is considering:

• an increase to the current salary level of $23,660 per year, with internal and external sources advocating for a new salary level ranging from $42,000 to $69,000 per year;
• an adjustment to the primary duty test, presumably to implement a California-style hard 50% limitation on work deemed non-exempt, although a different — and more workable — standard (e.g., 30%, 40%) is certainly possible; and
• other changes to the duties tests, such as limitation or elimination on the ability of managers to engage in management and non-exempt work concurrently or the re-introduction of the requirement that an administrative employee’s work be related to management “policies.

Following the meetings, the Department missed its November target date and identified a new target date of February. The Department missed this date as well.  Although no new date has been announced, the expectation is that a proposal will be published in June or July. 

What potential regulatory changes could mean for employers

Salary test

Some estimates indicate that a salary increase to $50,400 per year would impact 5-10 million workers, many of whom are concentrated in the retail and hospitality industries. Of course, the impact of a salary increase would depend upon the exact size of the increase. It would, however, almost certainly have a larger impact in Southern states and rural areas than it would in the Northeast and metropolitan areas.

Notably, a sizeable increase in the salary level would (without a revision that would allow a pro rata salary) make it difficult to maintain part-time exempt positions. Under the current salary requirement, a part-time, pro-rated salary is sufficient to establish the exemption (provided that the pro-rated amount exceeds $455 per week). Effective elimination of part-time exempt employees would impact many flexible workplace arrangements. If their pro-rated salary was not in excess of whatever the new salary amount is, they would — at a bare minimum — need to meticulously record their working hours, even if they never approached 40 hours, because the FLSA’s “hours worked” recordkeeping obligations apply to all non-exempt employees.

Primary duty test

To the extent that the DOL makes significant changes to the primary duty test, those changes might eliminate (or substantially reduce) a manager’s ability to engage in “line work” and management concurrently. This could mean the loss of the exemption for some front-line managers, particularly in smaller establishments. For example, each time that a manager — even one who was unquestionably “in charge” of the establishment — checked a customer in or out, or wiped down a table in a restaurant, or took a reservation over the phone, her employer would need to track that time to ensure that it did not exceed whatever limitation the Department’s revisions would require. Alternatively, the employer could simply decide in advance that the employee would be non-exempt, which could involve a significant cultural change for a company.

In addition to the obvious issues, the proposed changes could limit opportunities for exempt employees to engage in non-exempt work for training purposes (both to show hourly employees how to perform the work and to better understand how to perform the work to improve supervision), as well as to address “all-hands-on-deck” situations. Should the Department eliminate the ability to engage in concurrent supervision, it potentially could limit application of many exemptions to corporate office employees and managers of large facilities.

Other revisions that might be under consideration would impact the application of the administrative or professional exemptions. For example, if the Administration added the requirement that certain positions must be involved in work related to management “policies,” (instead of the current “work directly related to management of general business operations”), it would dramatically limit the ability to claim the administrative exemption.

Clearly, the revisions that might be included in the proposal have the potential to make a significant impact on an employer’s operations. The specifics of the proposal — as well as its potential impact on the nation’s economy — are now under consideration at OMB. Along with the substantive proposed revisions, the Department had to prepare an economic analysis showing the cost of the new proposal. In addition, the law requires a Regulatory Flexibility analysis requiring the agency to show the impact on small business and justify any increase in small business burden.

The proposed regulations have been sent to OMB, and, ultimately, will be published in the Federal Register for comment by the regulated community.  Only after that notice, comment, consideration — and, presumably, another long debate surrounding the salary level — will any changes become applicable to the U.S. workforce. It can be expected that any dramatic change will generate Congressional hearings and attempts to use the appropriations process to stop the changes or even an attempt to use the Congressional Review Act to try to stop the revisions.

Employers should use this down time to consider the impacts these proposal might have on their operations — and their bottom line. A robust regulatory record will allow the Department to best analyze the impacts its proposal will have on the economy. Of course, considered economic input will be helpful to any legal challenges if the Department chooses to ignore the costs or significantly understates them in the regulatory process. And, with only a couple of months to create that record once the proposal is made, employers need to be thinking about these issues well in advance.

Alex Passantino is a partner in the Washington, D.C. office of the law firm Seyfarth Shaw LLP and co-chair of the firm’s Wage & Hour Litigation practice group. He is the former Acting Administrator of the U.S. Department of Labor’s Wage and Hour Division.