Employers Beware: Pay Changes Underway

by Nexsen Pruet, PLLC

During his February 2014 State of the Union address, President Obama pledged to rely on his own executive authority to take action on behalf of American workers. He has taken this commitment to heart, and over the past several months has flexed his presidential muscle through executive orders and presidential memoranda. Specifically, Obama has increased the minimum wage payable by federal contractors, directed the Department of Labor to loosen overtime pay requirements, and prohibited retaliation against federal contractor employees who discuss their compensation.

Increase in Minimum Wage

On Feb. 12, 2014, immediately after the State of the Union address, Obama signed an executive order increasing the minimum wage for federal contractor and subcontractor employees to $10.10 per hour in three steps over a two-year period beginning Jan. 15, 2015. Thereafter, the Secretary of Labor has the authority to increase the wage in accordance with inflation. While this order does not apply to non-contractor employees, the President’s action is part of an overall effort to increase the federal minimum wage for all employees, currently $7.25 an hour. In fact, since Obama first called for a minimum wage increase in his 2013 State of the Union address, several states – including California, New Jersey, New York, Rhode Island, Delaware, and West Virginia, as well as the District of Columbia – have increased their minimum wage requirements.

Overtime Pay Expansion

On Mar. 13, 2014, the President signed a memorandum instructing the U.S. Department of Labor (DOL) to broaden the rules providing for overtime pay for certain workers. Currently under the Fair Labor Standards Act (FLSA), certain workers who are classified as “executive,” “administrative” or “learned professionals” are exempt from being paid overtime for hours worked over forty in a workweek. According to Obama’s memorandum, however, these “white collar” exemptions “have not kept up with our modern economy.”

The memorandum does not reference any particular updates to the FLSA. However, one rule that the DOL is anticipated to consider is the $455 salary basis requirement for white-collar employees, which was last updated in 2004. Generally, exempt employees must be paid a salary of at least $455 a week. A change to this rule could increase the salary level requirement, which some states like California and New York have already done.

The DOL may also re-examine the “primary duty” test used to determine which employees are exempt. Under the current rules, an employee whose primary duty is non-exempt will be classified as non-exempt even if he or she also performs significant exempt duties. Currently, there is no bright line rule that an exempt employee is required to spend more than 50 percent of his or her time performing exempt work. The DOL’s revision of this rule could require a specific percentage of time that an employee spends performing exempt duties to retain the exemption; this could effectively result in the loss of the exemption for several categories of workers. The process of changing the DOL’s rules interpreting the FLSA is slow moving and involves a mandatory notice and comment period. Employers will have the opportunity to weigh in on any of these or other proposed changes during the comment period by submitting remarks to the DOL.

Equal Pay Initiatives

On April 8, 2014, in honor of National Equal Pay Day, Obama issued both an executive order and a presidential memorandum to prevent workplace retaliation and inequalities in pay among women and minorities. The order prohibits federal contractors from retaliating against employees who choose to openly discuss their compensation.

Importantly, the order does not apply to instances where an employee who, as a part of his or her job function, has access to the compensation information of other employees and improperly discloses that information to other employees.

The accompanying memorandum instructs the Secretary of Labor, within 120 days, to establish new regulations requiring federal contractors to submit to the DOL summary data on compensation paid to their employees by race and sex. According to the memorandum, the DOL would then use this data to “direct its enforcement resources toward entities for which reported data suggest potential discrepancies in worker compensation….”

While the executive order and memorandum specifically address federal contractors, all employers should note that Title VII and the Equal Pay Act prohibit discrimination in terms of employee compensation. With more than two years remaining in Obama’s second term, employers should anticipate further action by the President as he seeks to impose reforms without going through Congress.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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