Click on one of the topics below to learn more.
Currently under the Fair Labor Standards Act (FLSA), an individual must satisfy three criteria to qualify as a white collar employee exempt from federal overtime pay requirements: first, they must be paid on a salary basis (the salary basis test); second, that salary must be more than $455/week ($23,660 annually) (the minimum salary requirement or salary threshold); and third, their “primary duties” must be consistent with executive, professional or administrative positions as defined by the US Department of Labor (DOL) (the primary duties test). Employees who do not meet these three requirements or fail to qualify for another exemption must be treated as “hourly” or “nonexempt” employees and be paid for each hour worked and at a rate of one and a half times their normal hourly rate for all hours worked over 40 in a given work week. The latter is known as overtime pay. To ensure employees are paid for all hours worked and at the proper rate for overtime, employers must carefully track the hours nonexempt employees work.
President Barack Obama issued a memorandum on March 13, 2014, directing DOL to “modernize” the FLSA overtime regulations governing eligibility for the white collar exemption. On July 6, 2015, DOL published proposed changes to the regulations. On May 18, 2016, DOL issued a final rule that includes drastic changes to overtime rules.
The first change is a massive and unprecedented increase to the salary threshold. DOL’s new salary threshold of $913 per week ($47,476) is a 100% increase over the old level of $455 per week ($23,660 annually) and is higher than minimums set under any state laws—nearly $10,000 higher than that of California and nearly $15,000 higher than that of New York, two of the states with the highest costs of living and the highest salary thresholds. DOL will allow up to 10 percent of the salary threshold to be met by non-discretionary bonuses, incentive pay or commissions, provided these payments are made at least on a quarterly basis.
Moreover, at no point in history has the salary threshold created an absolute bar to exempt status for such a high percentage of executive, professional and administrative employees. Historically, the agency’s position has been that the threshold is simply intended for “screening out the obviously nonexempt employees,” and it has relied on the duties test to evaluate whether employees making more than the minimum salary fit within the exemption. DOL’s new rule is inconsistent with this time-tested model and since the agency implements a minimum salary threshold at $47,476 per year, millions of executive, professional and administrative employees that would have fit within the white collar exemptions as they have been defined for the last 80 years will be reclassified as hourly employees.
DOL’s new rule also will increase the salary threshold automatically every three years. Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the lowest-wage Census region, estimated to be $51,168 in 2020. DOL will post new salary levels 150 days in advance of their effective date, beginning August 1, 2019. This is an unprecedented change. From 1938 to 1975, DOL regularly updated the salary level every 5-9 years. While there was no update between 1975 and 2004, complications in applying some outdated provisions in what was known as the “long” duties test” to the modern white collar employees may explain this delay. In 2004, DOL modernized and streamlined the duties test and updated the salary level, so application of the long test to the modern economy no longer imposed an impediment to regular updates to the salary threshold. Presumably, the current administration did not update the salary level within the historic 5-9 year time frame because of the great recession and the associated prolonged and difficult recovery. This was a wise course of action and argues against any “automatic” updates, as the future of the economy is always uncertain and automatic increases could exacerbate future difficulties in the economy.
Roughly 300,000 comments were submitted to DOL during a remarkably short comment period of 60 days that ended on September 4, 2015 (A copy of the PPWO comments can be found here). Given the unprecedented nature of many of the proposals within the complex and lengthy NPRM, thousands of concerned parties requested that DOL extend the comment period—a request that was not heeded.
Additionally, while the final rule was being reviewed by the Office of Management and Budget (OMB), nearly 70 concerned stakeholders, representing higher education, non-profits, local and county governments and business groups met with officials urging the administration to reconsider its proposal and more carefully examine the potential impact before proceeding—it is clear that the Labor Department largely ignored addressing these concerns in the final rule.
According to DOL, 4.2 million workers across the country will be impacted by these changes. In the final rule, DOL lauds the advantages of overtime eligibility. While hourly pay and nonexempt status is appropriate for certain jobs, it is not appropriate for all jobs; otherwise Congress would not have created any exemptions to the overtime pay requirements.
There are also many advantages to exempt status. Employers must closely track nonexempt employees’ hours to ensure compliance with overtime pay and other requirements. As a result, nonexempt employees often have less workplace autonomy and fewer opportunities for flexible work arrangements, career training and advancement than their exempt counterparts. In addition, the FLSA’s rigid rules with respect to overtime pay also make it complicated for employers to provide hourly employees with certain incentive pay and bonuses. Thus, in many cases employees, who are reclassified or classified as hourly due to this rule, may lose important benefits and opportunities.
For example, under this final rule, many executive, professional and administrative employees will be classified or reclassified as hourly nonexempt employees and lose the opportunity to work from home or remotely, as it can be difficult for employers to track employees’ hours in those situations. Employers are also more reluctant to provide nonexempt employees with mobile devices or may place restrictions on their use, as employers need to account for any time employees spend on such devices.
Similarly, by setting the minimum salary threshold so high, the final rule makes it difficult for many employers to provide part-time exempt positions. Under the previous salary requirement, a part time salary is often sufficient to establish the position as exempt (it simply had to exceed $455 per week ($23,660 annually)). The new salary threshold of $47,476 would make such an arrangement far more difficult, effectively eliminating some flexible workplace arrangements and reducing opportunities for older workers looking for a phased retirement, or people re-entering the workforce after a prolonged absence such as mothers coming back after their children have grown.
For example, under the old rule a full time salaried employee making $60,000 could have the opportunity to reduce his or her position to half time to allow more family time and still be exempt at $30,000. Since the salary threshold was raised well above $30,000, however, this employee would no longer be exempt. In that case, the employer would need to meticulously record the employee’s working hours, even if he or she never approaches 40 hours, because the FLSA’s “hours worked” record keeping obligations apply to all nonexempt employees. If the position is an executive, professional and administrative position, it may not lend itself to hourly tracking, and the employer may be reluctant to allow employees to work part time in the position if it means they must be reclassified to nonexempt. The employer would also be subject to variations in weekly costs, because the employees’ hours and pay might differ from week to week. These changes will make providing such part time positions more difficult.
In addition, nonexempt status can lead to fewer opportunities for career advancement. Again, changing to nonexempt status requires employers—and employees—to watch the clock. For example, employees who have reached or are near 40 hours of work in a week may need to skip additional training or other career-enhancing opportunities, because the employer is not able to pay overtime rates for that time.
Finally, when employees are converted to nonexempt status, they often find that they have lost their ability to earn certain incentive pay (e.g., bonuses). Under the existing rules, employers that provide incentive payments to hourly employees must include those payments in the employees’ “regular pay rate” for purposes of calculating overtime pay rates, even if the bonus is provided months after the overtime takes place. Faced with the difficult recalculation of overtime rates—sometimes for every pay period in a year, employers often simply forgo these incentive payments to nonexempt employees rather than attempt to perform the required calculations.
It’s also important to note that in most cases those reclassified to nonexempt status as a result of the new rule will not receive a pay increase and in some cases, may see a decrease in pay. Just because an employee is eligible for overtime pay does not necessarily mean the employee will earn overtime pay. Hourly employees are not guaranteed any fixed weekly pay—like salaried employees—or guaranteed any specific hours. Employers must carefully manage labor costs to remain in business and frequently limit employees’ hours to prevent paying overtime. There is no reason to believe employers will stop doing so after DOL implements this rule.
There are other negative consequences that can accompany reclassification of executive, professional and administrative employees to hourly nonexempt status. When employees have been reclassified from exempt to nonexempt, there is very often a decline in employee morale, as this change is generally seen as a loss of “workplace status.” Employees often believe they are being punished or demoted, and some even lose trust that their employer sees them as a professional. Forty five percent of retail and restaurant managers surveyed by the National Retail Federation (NRF) believe a change in employment status from salaried to hourly would make them feel they’re working a job rather than pursuing a career; 86% believe their perceptions of themselves as managers would deteriorate in some way.
All of these possible consequences of being classified as hourly will fall disproportionately on executive, professional and administrative workers in cities and states with lower costs of living, including college graduates in those areas who will start their professional careers with less flexibility, fewer opportunities for advancement, and less recognition for their accomplishments. For example, white collar workers in Indiana, Nebraska, Iowa and Kentucky may be classified as hourly even though they do the same work as employees classified as exempt in New York and California because of regional differences in pay, which are reflective of regional differences in cost of living. This is the case even where the employees in Indiana, Nebraska, Iowa and Kentucky have relatively more purchasing power than their counterparts in New York and California.
In short, hourly pay and nonexempt status is appropriate for certain jobs, but it is not appropriate for all jobs; otherwise there would be no exemptions to the overtime pay requirements.
Employers are concerned that DOL’s dramatic changes will reduce opportunity and flexibility for millions of executive, professional and administrative employees who would have historically qualified as exempt salaried workers but will not under DOL’s new rule. As noted above, at no point in history has the salary threshold created an absolute bar to exempt status for such a high percentage of executive, professional and administrative employees. Exempt employees often enjoy greater flexibility and opportunity than their nonexempt counterparts.
Small and large businesses, nonprofits, municipalities and schools across the county are also concerned about the administrative and labor costs associated with the new rule. Data provided to the College and University Professional Association for Human Resources (CUPA-HR) shows this increase will result in significant costs — the combined cost estimates from 35 of 1900 member institutions that provided data is nearly $115 million — to institutions of higher education and would inevitably trigger tuition hikes and reductions in force and services. Nonprofit employers will be especially hard hit as they do not have the ability to increase their revenue through price increases or other means. They are usually dependent on a combination of philanthropy and tax funding. Increasing their labor costs will likely mean a reduction of the services they can provide to those who depend on their operations.
These costs will disproportionally fall on those businesses, nonprofits, municipalities and schools in cities and states with a lower cost of living. A salary level set for New York City, San Francisco, and Washington, DC, will not work for Birmingham, Boise, Cincinnati, Detroit, Indianapolis or St. Louis, let alone the rural and small towns spread out across the country. Yet, DOL’s new salary threshold is higher than minimums set under any state laws, nearly $10,000 higher than that of California and nearly $15,000 higher than New York, two of the states with the highest cost of living.
Automatically updating the minimum salary threshold will also result in instability in labor and administrative costs for job creators across the country. Each time DOL issues a new salary threshold, businesses will be forced to reconsider the classifications given to their employees and reassess potential raises, bonuses, or promotions for those employees. Employers will need to constantly review the impact the automatic increases have on salary compression, merit increases and budgets. This reconsideration of positions costs money and could easily happen during a downturn in the economy, thus exacerbating the problems for employers at the worst possible time.
Since originally proposed, DOL’s rule has been met with widespread opposition from small and large businesses, nonprofits, local governments, academic institutions and the Small Business Administration’s Office of Advocacy – all of which have urged the Department to more closely examine the impact of the changes and consider less harmful alternatives. The Secretary of Labor has ignored the concerns of tens of thousands of individuals and organizations across this country that expressed concern with the proposal and, instead, issued a rule that will have devastating consequences on employees, the employer community, and the economy as a whole. Congressional action is now the only means of stopping this destructive rule.
For these reasons, the Partnership to Protect Workplace Opportunity supports two pieces of legislation aimed at minimizing the negative consequences of the new rule. First, the Protecting Workplace Advancement and Opportunity Act (S. 2707 and H.R. 4773), which was introduced by Senators Scott and Alexander and Representatives Walberg and Kline, if enacted, would require the Labor Department to conduct a new and comprehensive economic analysis on the impact of mandatory overtime expansion to small businesses, nonprofits and public employers as well as an analysis on the effect on employee flexibility before implementing a change to the exemptions. Also, it would eliminate the regulation’s every three year automatic update provision.
Second, the Partnership supports the Overtime Reform and Reform and Enhancement Act (H.R. 5813), introduced by Representative Kurt Schrader, which would phase-in the DOL’s new salary threshold over three years, starting with a salary threshold increase to approximately $36,000 on December 1, 2016, and the rest going into place over the next three years with the final installment taking effect December 1, 2019. The legislation also prohibits the final rule’s automatic increases to the salary threshold, and specifies that any future changes must be made through the customary notice and comment process.
The Department of Labor (DOL) issued its final rule making changes to Part 541 governing overtime exemptions under the Fair Labor Standards Act (FLSA) on May 18, 2016. The rule was published in the Federal Register on May 23, 2016.
The Partnership’s members are disappointed that the final rule includes a significant increase to the salary threshold and automatic increases in the future. These will present considerable challenges to employees and employers. This is why PPWO-supported legislation to block the rule, pending a full economic analysis of the changes to overtime regulations, is still needed. This legislation also contains critical provisions preventing the rule from including automatic updates to the salary threshold.
Here are the key elements of the new regulation that you need to know now:
1. Salary Threshold Changed to $913/week ($47,476 per Year)
This threshold doubles the current salary threshold level. While this level is slightly lower than the threshold in the proposed rule, it still encompasses many employees that are currently classified as exempt. PPWO was disappointed that DOL did not offer a more reasonable increase pegged to, as it was in the past, a level designed to identify those employees that are clearly not engaged in exempt-type work, rather than deliberately expanding the number of employees eligible for overtime.
2. Automatic Salary Threshold Increases Every 3 Years (Not Annually) to Maintain Level at 40th Percentile in Lowest-Wage Census Region
DOL reduced the frequency of the automatic increases in response to concerns raised by PPWO and many others. Instead of annual increases, the threshold will be adjusted every 3 years to maintain the level at the 40th percentile of full-time salaried workers in the lowest-wage Census region. Automatically updating the salary threshold, however, does not allow the government to take into account changing economic conditions, specific impact on certain industries, or regional differences. It also denies the public the ability to have input on the threshold as required by the regulatory process.
3. Duties Test is Unchanged
The absence of a duties test change is a significant win for the thousands of stakeholders who expressed concern in this area. DOL made no changes to the standard duties test.
4. Effective Date is December 1, 2016
We advocated for a longer implementation period than the 60 days suggested in the proposal, and the final rule provides a period of almost 200 days, going into effect on December 1, 2016. Employers in conjunction with their HR professionals should review their current workforce immediately to determine which employees are affected, whether to re-classify those employees or increase salaries to maintain exempt status, and devise a communications strategy. Employers will also want to keep in mind the periodic adjustments and set a regular review process.
5. Highly Compensated Employee (HCE) Exemption Is Now $134,004 Per Year
The final rule increases the salary threshold for HCEs to $134,004, instead of the proposed $122,148. The new regulation retains the methodology in the proposed rule setting the threshold at the 90th percentile of full-time salaried workers nationally. This threshold will also be updated every three years.
6. Up to 10% of the Salary Can Come From Bonuses or Commissions
The Department floated allowing a 10% credit for bonuses or commissions and this is what they included in the final regulation. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, however, such payments must be paid on a quarterly or more frequent basis and the employer is “permitted” to make a “catch-up” payment. More specific details of this new development are still unclear.
7. Advocacy in Congress is Even More Important Now
Now that we know what’s in the final regulation, the need for Congress to act is clear. Congress must work to pass legislation to protect nonprofits, local governments, higher education institutions and small businesses. There are currently two bills that would do just that: the Protecting Workplace Advancement and Opportunity Act (S. 2707 and H.R. 4773) and the Overtime Reform and Enhancement Act (H.R. 5813). S.2707/H.R. 4773 would require the Labor Department to conduct a rigorous economic study on the impact of these changes to our nation’s most vulnerable employers before implementing a change to the exemptions, and H.R. 5813 would phase-in the new salary threshold and prohibit the final rule’s automatic increases to the salary threshold. Visit PPWO’s Action Center to quickly and easily send an email to your members of Congress to ask that they cosponsor these important workplace bills.