Federal Overtime Regulations Could Change Significantly

Later this month, the United States Department of Labor ("DOL") is expected to issue proposed revisions to the existing overtime regulations that could significantly change the rules regarding eligibility for overtime under the Fair Labor Standards Act ("FLSA"). Last March, President Obama signed a memorandum directing the Secretary of Labor to, "modernize and streamline the existing overtime regulations", which were last updated in 2004. Specifically, the President instructed the DOL to address the overtime exemptions for executive, administrative, and professional employees to "address the changing nature of the workplace."

Generally, the FLSA requires employers to pay overtime to all employees unless an employee falls under a specific exemption. The FLSA provides exemptions to its overtime requirement for an employee who is employed in a bona fide executive, administrative or professional capacity. It is the employer’s burden to show that an employee satisfies every element of an exemption’s multi-part test, which are as follows:

Executive Exemption

  • The employee must be compensated on a salary basis of at least $455 per week;
  • The employee’s primary duty must be managing the enterprise in which he or she is employed or managing a customarily recognized department or subdivision of the enterprise;
  • The employee must customarily and regularly direct the work of two or more other employees; and,
  • The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations regarding hiring, firing, advancement, promotion, etc., must be given particular weight.

Administrative Exemption

  • The employee must be compensated on a salary basis of at least $455 per week;
  • The employee’s primary duty must be performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and,
  • The employee’s primary duty must also involve exercising discretion and independent judgment with respect to matters of significance.

Professional Exemption

  • The employee must be compensated on a salary basis of at least $455 per week; and,
  • The employee’s primary duty must be performing work that requires either: (a) knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or (b) invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

All of the exemptions listed above require that the employee be paid a fixed minimum salary of at least $455 per week (called the "salary basis" test). In addition, each exemption has its own specific set of job duties the employee must perform (called the "duties" test).

These exemptions have long been a source of litigation, as well as a source of confusion for employers. One of President Obama’s stated goals is to, "simplify the regulations to make them easier for both workers and businesses to understand and apply."

Specifically, the DOL is expected to overhaul both the salary basis test and the duties test. It is believed the DOL will increase the minimum salary of the salary basis test. Some reports have indicated the DOL will seek to increase the salary basis threshold from $455 per week ($23,660 per year) up to $808 per week ($42,000 per year). In addition, some members of Congress are lobbying to increase the amount to as much as $1,327 per week ($69,000 per year). Regardless of how much the salary basis threshold increases, more employees will automatically become eligible for overtime.

Less is known, however, about how the DOL will attempt to change the duties tests. The last time the FLSA regulations were revised in 2004, the revisions moved away from the use of quantitative, objective factors—such as the amount of time an employee spends on exempt duties versus nonexempt duties—and shifted the focus to a more qualitative, subjective test like the current "primary duties" analysis. Some observers, including the Secretary of Labor, have claimed this move created a loophole that allows employers to treat many workers as exempt despite the fact that the majority of their time is spent performing nonexempt duties. Accordingly, it is possible that any changes to the duties test may include at least some form of return to an objective, time-based factor.

Two things are almost certain regarding the DOL’s proposed changes. First, the DOL’s proposed revisions are likely to narrow the scope of the exemptions. Second, the number of employees eligible to receive overtime will increase. All proposed changes to federal regulations must go through a relatively lengthy rulemaking process, and thus, not be effective until late 2015 or 2016.

However, now may be a good time to review and reevaluate your exemption classification decisions to ensure compliance.

If you would like assistance analyzing your employee exemption classifications, or if you have any questions about this article, please contact Andrew Chase at achase@seatonlaw.com or any of the other Peters, Revnew, Kappenman & Anderson, P.A. attorneys.

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