On March 13, 2014, President Obama signed a Presidential Memorandum that directed Secretary of Labor Tom Perez to review the Fair Labor Standards Act (“FLSA”)[1]  and revise the  regulations that define who qualifies for overtime protection.  The Memorandum was spurred by what President Obama sees as the degradation of the spirit of FLSA—if you work more, you are paid more—leaving millions of low-paid salaried workers without overtime protection.[2]  “I’m directing Tom Perez, the secretary of labor, to restore the commonsense principle behind overtime,” Obama said.  “If you go above and beyond to help your employer and your company succeed, then you should share a little bit in that success.”

However, according to groups supporting business owners, this isn’t the President’s first anti-business administrative action.[3]  The U.S. Chamber of Commerce said, “The Obama Administration hopes to wave its magic regulatory wand to raise the incomes of millions of workers,” and referred to the President’s maneuver as the “Administration’s Economic Policy Magic Show.”  As a result, the President’s actions are certain to be controversial.

FLSA provides overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a work week. However, the Department of Labor (“DOL”) has the authority to define exceptions to overtime requirements through regulations. The furthest reaching exemption is commonly known as the white-collar exemption.  In general, employees that have “executive, administrative and professional”[4] job duties and that meet the designated salary threshold are not entitled to overtime.  The  exemption is a federal rule meant to limit overtime for highly paid employees that are in administrative roles.  The President is concerned that the current test for the white-collar exemption has not kept up with inflation and modernization of the workplace, thus eroding the overtime entitlement for middle class individuals.  The U.S. Chamber is concerned that making millions of additional workers eligible for overtime will not stimulate the economy in the way the President envisions because in the real world, “businesses must do business, make payroll, and make a profit.”

The salary threshold for the white-collar exemption has been updated twice in the last 40 years and now covers workers earning at least $455 a week. In 1975, the white-collar exemption allowed employers to deny overtime protection to workers earning more than $250 a week, today’s equivalent of $1,000 per week.  Whereas, the current threshold, passed in 2004, is $455 a week.  Four Hundred and Fifty-Five Dollars per week amounts to $24,000 per year and falls below poverty line for a worker supporting a family of four.  Perez said, “by updating who qualifies for overtime pay, we are expanding opportunity and making sure hard work pays.”[5]  The initiative is expected to focus on tightening the qualifications for workers to be classified as bona fide executive, administrative and professional employees.

The standard duties tests for the white-collar exemption does not apply based upon job title alone, but rather upon the character of the employee’s job as a whole which calls for a case-by-case assessment of an employee’s job duties. To meet the legal definition of “executive,” the employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; the employee must customarily and regularly direct the work of at least two or more other full-time employees; and must have the authority to hire or fire other employees.[6]  To meet the legal definition of “administrative”, the employee’s primary duty must be the performance of 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 include the exercise of discretion and independent judgment with respect to matters of significance.[7]  To meet the legal definition of “professional,” the employee must be either a learned professional or a creative professional.  The learned professional test requires the employee’s primary duty to be performance of work requiring advanced knowledge; the advanced knowledge must be in a field of science or learning; and the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.[8]  The creative professional test requires the employee’s primary duty to be performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.[9]

The fact sensitive analysis required for the standard duties tests can make it difficult for employers to know whether their employees are entitled to overtime pay. The unclear regulation can create unneeded costs and time for both the employer and employee when conflict arises and employees seek to enforce the overtime requirements under FLSA.  The ambiguities also allow for administrative error when an individualized inquiry is made.  For example, under the existing executive test, customarily and regularly may be interpreted differently by different employers,  administrators and courts.  Another one of the many uncertainties is in the definition of customarily acquired by a prolonged course of specialized intellectual instruction.  Under the existing “professional” test, an employee that performs substantially the same work as a degreed employee may satisfy the requirement, but employees that acquire their skill by experience do not.  

Changes in the exemptions will likely affect the salary basis and the duty components of the white-collar exemption to expand coverage and clarify the bonafide administrative employee tests. The salary basis will be the quickest way to expand protection and will affect the budget of employers across the country. The duties test may take longer to affect employers and entitle large amounts of workers to overtime protection because of the interpretation necessitated, and the enforcement that will follow, as individual inquiries arise.  If and when the regulations provide overtime benefits to millions of American workers that currently are not entitled to overtime, it will be increasingly important for employers to define their employees’ jobs clearly from the outset and to detail the employee’s duties and authority in writing.  Changing overtime eligibility will make millions of employees  more expensive so clearly defining roles and duties is one way to cover the possibility of increased costs.  Furthermore, if employers choose to deny overtime pay to its employees, the employer must be diligent in revising its employees’ written duties and authority to align with employees’ actual daily functions.

Even if the regulations are changed, a federal court challenge is likely. Regardless, employers should implement practices clearly defining the roles and duties of their employees to make overtime decisions defensible.  Even if an employer pays overtime, it may lower the hourly rate or use the fluctuating hours method to reduce costs.   

[1] 29 U.S.C. § 201 et seq.

[2] White House, “Residential Memorandum – Updating and Modernizing Overtime Regulations,” 13 March 2014, available at http://www.whotehoues.gove/the-press-offie/2014.03/13/presidential-memorandum-updating-and-modernizing-overtime-regulations

[3] The White House proposed to raise the federal minimum wage to $10.10 per hour. See http://www.whitehouse.gov/blog/2014/02/12/economic-case-raising-minimum-wage.

[4] 29 U.S.C. § 201.13(a)(1).

[5] United States Dept. of Labor, “Opportunity for All Fixing Overtime Rules to Reward Hard Work,” 13 March 2014, available at http://social.dol.gov/blog/fixing-overtime-rules-to-reward-hard-work

[6] United States Dept. of Labor, “Fact Sheet #17B: Exemption for Executive Employees Under [FLSA],” Jul 2008, available at http://dol.gov/whd/regs/compliance/fairplay/fs17b_executive.pdf

[7] United States Dept. of Labor, “Fact Sheet #17C: Exemption for Administrative Employees Under [FLSA],” Jul 2008, available at http://dol.gov/whd/regs/compliance/fairplay/fs17d_administrative.pdf

[8] United States Dept. of Labor, “Fact Sheet #17D: Exemption for Professional Employees Under [FLSA],” Jul 2008, available at http://dol.gov/whd/regs/compliance/fairplay/fs17d_professional.pdf

[9] Id.