On Sept. 14, 2018, the Department of Labor (DOL) conducted a fourth public listening session on proposed changes to the Fair Labor Standards Act (FLSA) overtime exemption. The session was one of four public listening sessions offered by the DOL last month. The series is part of a larger rulemaking and comment period being offered by the DOL in the wake of ongoing litigation to determine the appropriate salary threshold for overtime-exempt employees.
The Overtime Exemption
Under federal law, employers are required to pay employees overtime pay of not less than one and one-half their regular rate of pay for all hours worked over 40 in a single workweek. However, the FLSA exempts from overtime protection employees employed in a bona fide executive, administrative or professional capacity (so long as they satisfy the “duties test”). In addition, the FLSA delegates to the Secretary of Labor the power to define and delimit terms through regulation.
Historically, the standard salary level for exempt white-collar employees, including executive, administrative and professional employees, has been $455 per week, or $23,660 per year. Since the Bush administration first established that figure in 2000, the number has stagnated alongside the federal minimum wage, even as the inflation rate has continued to rise.
On July 6, 2015, in response to concerns raised by labor advocates regarding the decreasing value of the minimum wage, the DOL published a Notice of Proposed Rulemaking (NPRM) in the Federal Register to increase the exemption limit. Among the key changes to the rule were an increase in the salary threshold to $913 per week, or $47,476 per year, and a mechanism for automatically updating the salary levels every 3 years. The proposed changes also sought to increase the annual salary threshold for highly compensated employees and increase the motion picture producing exemption base rate from $695 to $1,404 per week.
After receiving input from more than 270,000 stakeholders during the comment period, the DOL issued its Final Overtime Rule in May 2016, with changes scheduled to go into effect on Dec. 1, 2016.
On Sept. 20, 2016, 21 states and a coalition of business organizations filed separate legal challenges seeking to invalidate the proposed rule on the grounds that the DOL exceeded its statutory authority, in part, under the Administrative Procedures Act (ACA). Specifically, the group took issue with the DOL’s authority to issue the proposed salary requirements and argued that the indexing of automatic adjustments bypassed the required notice and comment period. As part of this challenge, the petitioners sought a preliminary injunction to delay the proposed rules from taking effect.
On Nov. 22, 2016, just days before the scheduled implementation date, Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas granted the petitioners’ request for a preliminary injunction and issued a temporary nationwide ban on the proposed regulation. The DOL responded by filing an expedited notice of appeal to the U.S. Court of Appeals for the Fifth Circuit, which was later denied. Thereafter, on Aug. 31, 2017, during the pendency of this appeal, Judge Mazzant ruled a second time in favor of respondents by granting their motion for summary judgment, which effectively invalidated the revised regulations in their entirety.
After initially pursuing an appeal of the district court’s summary judgment decision, the DOL filed a motion to hold the appeal in abeyance, on Oct. 20, 2017, pending further review of the exemption limit. The DOL has since filed a request for information (RFI) seeking input on the following questions:
- What is the appropriate salary level (or range of salary levels) above which the overtime exemptions may apply?
- What benefits and costs to employees and employers might accompany an increased salary level?
- What is the best methodology to determine an updated salary level?
- Should the DOL more regularly update the standard salary level and the total annual compensation for highly compensated employees?
In a recent listening session held in Denver, Colorado, last month, stakeholders offered insight on proposed changes, which the DOL will likely consider in the coming weeks (particularly as it prepares to issue a revised NPRM). The attendees included representatives from multiple industry sectors, along with other corporate executives, small business leaders, attorneys, public officials, human resource professionals and nonprofit companies.
In near-unanimous fashion, the parties concluded that the Bush-era salary thresholds were too low given the cost of living. However, for many, the DOL’s decision to double the exemption limit was a “shock to the system.” Employers stressed the need for predictability and planning with respect to its annual budget, while advocating for a more gradual approach.
Without pinpointing a specific number, participants indicated that most employees become salaried (as opposed to hourly) in the $30,000 per year range. As compared to the latest draft of the rule, this sort of increase would be preferable to employers, even considering the potential financial impact.
Participants also highlighted the detrimental effects of the proposed changes on the business community. Chief among those concerns was the assertion that real wages would not go up, as others have claimed. Instead, a change in the exemption limit would create a domino effect resulting in 3 significant changes, none of which would benefit employees.
First, to keep wage costs neutral, non-exempt employees who were previously salaried would be required to work fewer hours. This would ensure that no person could earn more compensation per year on an hourly basis than what would have been possible on a salary basis (which, by all reasonable accounts, is a very likely outcome given the nature of salaried work).
Second, as an additional buffer, employees would become overtime-restricted. Again, this would ensure that overall wage payments remain neutral.
Finally, to account for the minimization of hours (and likely reduction of productivity), employers would hire more employees to perform work, including on a part-time basis. This, participants argued, would have no significant impact on real wages.
In addition, parties raised concerns about the impact of the proposed changes on remote work (e.g., use of cell phones and computers after hours), and the possible adversarial relationship created by the shift to non-exempt work. For at least one employer, a post-2015 decision to comply with the new rule resulted in the resignations of several long-term salaried employees. A small business leader also voiced concern over the displacement of younger employees caused by the transition of managers into a timekeeping role. Several other parties requested exemptions within their specific sector or industry (e.g., nonprofits).
In general, most parties agreed that the exemption limit must be tied to real wages, or to a similar price index (e.g., Consumer Price Index). To be sure, this would help resolve the economic disparity between wage rates and inflation caused by the current limit. The only significant disagreement with respect to this issue was whether variation was needed for localities and states. The takeaway there is a possible headache for human resource professionals of companies with employees in multiple jurisdictions. Even so, local application may help resolve economic discrepancies created by specific tax rates. It is unclear whether this would also help an employer.
It is anticipated that, under any version of the regulation, regular updates will be provided. Though participants disagreed as to the precise interval, most advocated for updates between every 3 and 10 years, for fear of rehashing the statute on an annual basis. Some participants also cautioned the DOL to include a notice and comment period for each voting period, to avoid violating any part of the ACA.
In the coming weeks, the DOL will continue to seek input from employers on these and other critical matters. Employers wishing to contribute to the debate may do so at the next public listening session, or when the DOL issues its second NPRM.