Takin' Care of Business and Working Overtime: U.S. Department of Labor Issues Proposed Rule Raising the Overtime Threshold

On June 30, 2015, the U.S. Department of Labor issued a proposed rule that would raise the overtime threshold under the Fair Labor Standards Act (the “FLSA”) to a “standard salary level equal to the 40th percentile of earnings for full-time salaried workers,” estimated to be $50,440 in 2016.  If implemented, the proposed rule would create a right to mandatory overtime pay for many employees who currently are not entitled to it.

To explain the significance of this proposed change, a general review of mandatory overtime pay is helpful.  The FLSA is the primary federal law governing minimum wage and overtime pay.  The law generally requires employers to pay employees a minimum wage (currently $7.25 per hour) and an overtime premium for hours worked in excess of 40 per workweek, at a rate of one and one-half times the employee’s “regular rate” of pay.

Currently, hourly workers are guaranteed the right to overtime pay, while salaried workers’ eligibility for overtime pay depends upon their salary and the nature of their duties.  If a salaried worker earns below $455 per week, or $23,660 per year, he is automatically eligible for overtime pay.  However, if a salaried worker earns at least $455 per week, and his duties fit within one of three exempt categories: executives, administrators, and professionals (commonly referred to as “white collar” positions), he is not entitled to overtime pay.  Each of these exempt white collar positions is defined by a set of duties showing that the employee is skilled, exercises independent judgment, and/or supervises other employees.  This means that many employees in white-collar positions with low salaries (as low as $24,000 per year) can currently be classified by their employers as employees exempt from the FLSA rules requiring mandatory overtime pay.

In a memorandum dated March 13, 2014, President Barack Obama expressed his view that the salary threshold to be exempt from overtime pay for white collar exempt positions ($23,600 per year) was “outdated,” i.e., too low, and directed the Secretary of the U.S. Department of Labor (the “DOL”) to promulgate new rules.  On June 30, 2015, in response to President Obama’s directive, the DOL issued a proposed rule which, among other things, raises the overtime pay exempt threshold to a “standard salary level equal to the 40th percentile of earnings for full-time salaried workers,” estimated to be  $50,440 for 2016.  In sum, the DOL is proposing that a white collar employee must receive overtime pay unless the employee makes an annual salary of at least $50,440.  In order to prevent the salary threshold from once again becoming “outdated” as time passes, the DOL proposal suggests implementing a salary threshold that automatically updates on an annual basis, either by maintaining the levels at a fixed percentile of earnings or by updating the amounts based on changes in the Consumer Price Index.

The amended regulations will likely become effective in 2016.  The final rule may vary from the proposed rule discussed above, but the message is clear: a large number of employees who are currently not entitled to mandatory overtime pay will be reclassified as non-exempt employees and will become entitled to mandatory overtime pay.  We suggest that employers begin to prepare now by conducting a privileged classification audit with an attorney to review the positions currently classified as exempt, determine the employees who may be considered non-exempt under the lower threshold set forth in the proposed rule, and assess the record keeping and financial impact of treating those employees as non-exempt employees going forward.

If you have questions about the FLSA or the impact of the proposed rule, please do not hesitate to contact us.

             Author: Jennifer A. Hataway              Practice Area: Labor & Employment Law              Date: August 31, 2015

Disclaimer: The information provided herein (1) is for general information only; (2) does not create an attorney-client relationship between the author or the author’s firm and the reader; (3) does not constitute the provision of legal advice, tax advice, or professional consulting of any kind; and (4) does not substitute for consultation with professional legal, tax or other competent advisors. Before making any decision or taking any action in connection with the matters discussed herein, you should consult with a professional legal, tax and/or other advisor who should be provided with all pertinent facts relevant to your particular situation. The information provided herein is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information.

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