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Legal Updates

DOL Poised To Expand Overtime Eligibility Dramatically Through New FLSA Regulations

The U.S. Department of Labor (“DOL”) has issued proposed regulations that, if adopted, would significantly expand the number of employees eligible for overtime pay under the federal Fair Labor Standards Act (“FLSA”).

Specifically, the proposed regulations would:

  • Raise to $970 per week – more than twice the current amount – the minimum salary that an employee must receive in order to fall within one of the “white collar” exemptions from overtime eligibility;
  • Increase from $100,000 to approximately $122,000 the total annual compensation necessary for an employee to qualify as an overtime-exempt “highly compensated” employee; and
  • Establish a mechanism by which those weekly and annual figures would be automatically adjusted each year, in accordance with changes in overall salary levels.

The DOL has estimated that the proposed new FLSA regulations would extend overtime eligibility to nearly five million additional workers within the first year of their implementation. Thus, employers need to consider carefully how their operations may be affected if and when the regulations go into effect.

FLSA’s Overtime Requirements

The FLSA governs, among other things, which employees are eligible for overtime pay under federal law. Under the FLSA, unless an employee falls within one or more overtime exemptions, an employee is entitled to be paid at a rate of at least one and one-half times his or her regular hourly rate of pay for all hours worked over forty (40) during any workweek.

The most significant overtime exemptions are known as the “white collar exemptions,” including, for example, the executive, administrative, and professional exemptions. Each of these exemptions has its own specific requirements. In general, however, to fall within one of the white collar exemptions, an employee must (1) hold job duties that meet certain criteria (generally, involving the exercise of independence and discretion and/or decision-making authority with regard to other employees); and (2) be paid a minimum weekly salary.

The minimum weekly salary required for the white collar exemptions – currently $455 – has been increased only twice during the past 40 years, most recently in 2004. Thus, due to the effects of inflation, many employees compensated at a fairly modest level have been excluded from eligibility for overtime pay.

The proposed regulations would address this situation by increasing the minimum weekly salary required for the white collar exemptions to the 40th percentile among all salaried employees, and by providing for automatic, annual increases tied to this same percentile level. In practical terms, this would increase the minimum annual salary from its present level of $23,660 per year to an estimated $50,440 per year in 2016.

Status And Potential Impact Of New Regulations

A 60-day public comment period for the proposed FLSA regulations closed this past September. According to the DOL, more than 250,000 comments were submitted.

While it is possible that the proposed regulations may be revised as a result of the comments submitted to the DOL, most observers anticipate that the regulations will not be changed significantly from their current form. However, the timetable for their eventual implementation remains unclear.

Before the new regulations go into effect, they may face court challenges by business groups, alleging, for instance, that the DOL did not adequately consider the likely economic impact of the proposed changes. Given, however, the deference courts generally give to administrative agency rulemaking, the prospects for such challenges seem questionable.

Barring a successful court challenge, the new regulations could bring dramatic ramifications for many employers. In particular, exempt white collar employees would need to be paid fixed salaries of at least $970 per week (with future annual increases), or else be reclassified as non-exempt, with commensurate overtime eligibility.

Employees in industries with large numbers of managers who regularly work long hours for relatively modest pay – such as the retail and hospitality industries – are likely to be hit particularly hard by the increased salary requirements. The same is true of businesses located in regions of the country with lower costs of living and, commensurately, lower overall wage levels.

Recommendations For Employers

 In light of the pending new FLSA overtime regulations, we recommend that employers:

  • Determine which, if any, of their exempt employees are currently being paid at salary levels that would fall below the new threshold for exempt status under the new regulations;
  • Begin considering how best to address those employees’ situations when the regulations go into effect – i.e., by raising their salaries to at least the new minimum weekly amount, or by reclassifying the employees as non-exempt. In the latter scenario, employers also may want to consider possible ways of limiting additional overtime obligations – for instance, by closely monitoring non-exempt employees’ weekly work hours, and/or hiring additional staff to minimize the need for overtime work;
  • Regularly review, in conjunction with experienced employment counsel, the FLSA classifications of their workforce as a whole, in order to ensure that employees are classified appropriately based on their job duties, compensation, and any other pertinent factors; and
  • Stay alert for further developments in this area, including future guidance from the DOL as to when the new FLSA regulations will be finalized and implemented.

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Please don’t hesitate to contact us if you have any questions about the proposed new FLSA regulations or how they may affect your organization.