On May 5, 2015, the U.S. Department of Labor (DOL) finally sent its proposed overtime rule to the White House Office of Management and Budget (OMB) for review, which comes nearly six months later than initially expected. Although late, Secretary Perez stated the rules are necessary to “help make sure that millions of workers are paid fairly for a long, hard day’s work.” The next step in this rule-making process is for the OMB to complete its review and the DOL to publish its proposal to give the public an opportunity to comment.

The origins of this proposed overtime rule come from President Obama’s March 13, 2014 memorandum requesting that the DOL “propose revisions to modernize and streamline the existing overtime regulations.” President Obama deemed this directive necessary because of his belief the Fair Labor Standards Act (FLSA) and related regulations “have not kept up with [the] modern economy.” There is some merit to this argument considering technology has effectively dimmed the bright line between work and off hours. Some employees have found themselves working around the clock while receiving no additional pay because their employer has classified them as exempt. Indeed, courts across the country have experienced a spike in FLSA claims because of this very issue.

Most employers know the FLSA requires employees to receive at least the federal minimum wage (state or local laws may have a higher rate that applies) for all hours worked along with overtime pay at time and one-half the regular rate of pay for all hours worked in excess of 40 hours in a workweek. The FLSA, however, does contain several exemptions from certain basic requirements such as minimum wage, overtime, recordkeeping and child labor restrictions. Those exemptions relevant to this discussion can be found in 29 U.S.C. § 213(a) and (b), or otherwise known as Section 13(a) and 13(b), respectively. The former section exempts employees from the minimum wage and overtime provisions of the FLSA while the latter exempts employees only from the overtime provisions of the FLSA. Many employers classify employees under the “white collar” exemptions of Section 13(a), which include bona fide executive, administrative and professional employees.

According to President Obama’s memorandum, these exemptions should be more difficult to obtain so that more employees are paid by the hour and entitled to overtime pay. Alternatively or additionally, President Obama may be attempting to reaffirm the initial purpose of the overtime provisions, which was to discourage employers from overworking employees and instead encourage them to hire more individuals. Whatever the goal, employers should expect these changes to impact their business.

Although the details of the rule will not be known until their publication sometime in June (according to the DOL’s spring 2015 semiannual regulatory agenda released May 20, 2015), some changes to existing regulation are anticipated based on statements from President Obama and members of Congress. It is expected the proposed rules will raise the threshold salary requirement necessary for employers to claim the exemption. It is also expected that the duties for the various “white collar exemptions” will be modified to make them more difficult to obtain.

While employers are not required to take immediate action to address the proposed rules, employers should begin examining how they have classified employees for overtime purposes. Accordingly, at the very least, employers should:

• Revisit Existing Classifications: Take a hard look at the duties performed by those who are currently classified as exempt under one of the “white collar” categories. Employers should feel fairly confident that the primary duties performed by such exempt employee fall squarely within the duties articulated by applicable regulation. Close calls will most likely end up falling outside the exemption requirements considering the proposed rules will only make exemptions more difficult to apply, not easier.
• Update Documentation: Make sure employees have written job descriptions that accurately reflect the actual duties performed by the employee and that policies and procedures are up to date.
• More Pay: Consider the feasibility of raising the pay for those “white collar” exempt employees earning near the threshold salary requirement of $23,660 per year. President Obama and the DOL have been urged to raise that minimum annual salary up to at least $50,000 and as high as $56,680. The exact number will be known once the rules are published.
• Business Analysis: Assess the financial costs and operational impact associated with potentially losing the application of an existing exemption due to the proposed rules and having to reclassify employees as non-exempt. These changes to the rules will inevitably cost employers money.
• General Compliance: Evaluate compliance with record keeping and retention requirements under the FLSA.

Much of this analysis is fact specific and can be complicated. It is important, however, that all employers who have employees classified as exempt under one of the “white collar” categories think about the impact of these changes now. Snell & Wilmer will provide another notification detailing the actual changes once the DOL publishes the rule.