Last month, I wrote about the Obama Administration’s Presidential Memorandum to the U.S. Department of Labor (DOL) instructing its Secretary to update regulations regarding overtime protection for workers under the Fair Labor Standards Act (FLSA), the federal law that establishes minimum wage and overtime pay requirements. Since then, DOL Secretary Perez has spoken publicly about the possible scope of the changes. I’ve also spoken at a couple of events on this issue, and have gotten three questions: Can the president really do this? What do you think DOL will do? How soon could this happen? I wanted to share my thoughts on these three questions and give you a sense of what I think about the direction the DOL will take when it does propose new rules.
A quick background on the FLSA’s “white collar” exemptions
By way of background, under the FLSA, employers must pay employees at least the federal minimum wage (currently $7.25/hour) and overtime at a rate of at least 1.5 times the employee’s regular rate for any hours worked over 40 in a week, unless exempt from the overtime requirement. The FLSA lists a number of various exemptions from the overtime requirement, but the most common of are the executive, administrative or professional exemptions, commonly referred to as the “white collar” exemptions. It is these exemptions that the White House is instructing the DOL to update.
In general, employees qualify for these overtime exemptions if: (1) they are paid a fixed minimum salary for each workweek regardless of the number of hours they work or the quality or quantity of work they perform (the “salary basis” test); and (2) they perform specific executive, administrative or professional job duties outlined by the regulations (the “job duties” test). These exemptions capture millions of workers and have been the source of many lawsuits challenging exempt status. Given the antiquated nature of these exemptions (actual or perceived), they appear to be the focus of any proposed regulatory changes. President Obama’s executive memorandum indicates that he wants the DOL to adjust both the salary basis and the job duties tests to narrow the scope of the exemptions, making more workers eligible for overtime pay.
Can the administration really do this without Congress?
In short, yes. This is an area that Congress has specifically left to the executive branch. President Obama does not need Congressional approval to make these changes to the FLSA regulations. While the FLSA establishes the white collar exemptions, it does not define them, leaving that authority to the DOL. President Bush used the DOL’s authority to make the most recent changes to the FLSA regulations in 2004, which increased the minimum salary and took away any requirement for a set minimum percentage of time spent performing exempt duties. Other than these changes by the Bush Administration, the exemptions have been largely untouched since the 1970’s.
The White House’s announcement is not a surprise given the administration’s focus on the misclassification of independent contractors and increased scrutiny given to exempt classifications by the DOL’s Wage and Hour Division. The timing of the memorandum also supplies some context as it is directly on the heels of the President’s executive order raising the minimum wage for workers under new federal contracts from $7.25 per hour to $10.10 per hour. Indeed, many consider this to be a political maneuver by President Obama as part of his larger agenda of raising the minimum wage and making a greater impact on job and economic growth
President Obama has instructed the DOL to modernize and streamline the existing overtime regulations and to do so in a way that is consistent with the FLSA’s intent, the changing nature of the workplace and which will allow both workers and business to better understand and apply the exemptions. In other words, the memorandum is lacking on specificity. That being said, given these broad guidelines and the administration’s focus, I expect that any revisions will likely focus on raising the minimum salary and further defining the job duties test.
What can employers expect?
First, any revised regulations would almost certainly include an increase to the $455 minimum weekly salary threshold for exempt workers. Even though the Obama administration did not provide any specific guidance, at $455/week, those workers earning as little as $24,000 per year currently meet the minimum salary threshold. Indeed, the White House observed that just 12% of salaried workers now fall below this threshold, compared to 65% in 1975 when the regulations set a $250/week minimum. California and New York already require employers in those states to pay higher minimums ($600 in New York, increasing to $675/week by 2016; $720/week in California, increasing to $800/week by 2016). I anticipate that an increase in the minimum salary would have the most impact on production, service and retail industries that have substantial numbers of low paid supervisors.
Second, any new regulations would likely change the various job duties test. The 2004 revisions to the FLSA regulations focused on subjective factors, such as “primary duties,” rather than the actual time spent by an employee on a particular duty. DOL Secretary Perez has described this current regulatory test as a "loophole" that lets employers treat many workers as exempt, even if the vast majority of their work is the same as non-exempt workers who receive overtime. In making such statements, Perez has referred to a lawsuit brought by a former store manager for the Family Dollar discount chain that alleged she and other managers had been improperly classified as executives when they spent the "vast majority" of their time on "non-executive tasks," such as stocking shelves. Secretary Perez claimed that the 2004 revisions to the "primary duty" test “eroded that article of faith” that workers should receive overtime for working more than 40 hours per week. Given these comments, the Obama administration seems set to return to some form of the pre-2004 test that would require at least a minimum percentage of time devoted to overtime exempt work.
Want to know what that might look like, and don’t remember the confusing pre-2004 federal regulatory regime? Look no further than California! That state continues to be a hotbed of wage and hour litigation, and the issue of proper classification of employees as “exempt” or “non-exempt” is often at the core of disputes before California’s state and federal courts and its Division of Labor Standards Enforcement (DLSE). California uses a “quantitative” test (seeChapters 52-54 of the DLSE Enforcement Manual) that focuses primarily on the percentage of time spent on individual duties, rather than the “qualitative” test in the current FLSA regulations. The state did not adopt the 2004 amendments to the FLSA regulations and, in some cases, still relies on the pre-2004 regulations for guidance on the executive, professional and administrative exemptions.
How soon would all of this happen?
Despite all the rhetoric, it is unlikely that any changes to the regulations will take place any time soon. Proposed changes to the regulations are subject to the federal Administrative Procedure Act’s rulemaking process, which means the administration would need to complete a number of time-consuming steps before any rule change could take effect. These steps include a required notice of proposed rulemaking and a public comment period. Then, the DOL would need to hear testimony, consider public comments, and have a final version of the revised regulations approved by the Office of Management and Budget. To put this in perspective, the 2004 regulatory change took over 18 months to implement, and those were not viewed as “drastic” as what is anticipated to come from the DOL as part of this initiative. Even if the administration can push through the new regulations before the end of President Obama’s term, affected parties are likely to file legal challenges to any revisions, which could potentially delay their implementation further.