Current Events in HR

HR News®

Proposed Overtime Rule: White-Collar Exemptions Will Fall

President Barack Obama, center, surrounded by supporters, signs a presidential memorandum directing Labor Secretary Thomas Perez to modernize overtime protections, March 13, 2014.

If the final rule on mandatory overtime resembles the initial proposal, the result would be a dramatically increased salary level for determining which employees would be exempt from overtime pay.

The U.S. Department of Labor (DOL) intends to set the new salary level at $970 a week, or $50,440 annually, for 2016. That’s more than twice the current threshold. The figure, which represents the 40th percentile of earnings for full-time salaried workers, would automatically rise each year. By contrast, the current salary level is static.

HR’s Challenges

Nearly everyone agrees that it’s time for an increase in salary level, said Tammy McCutchen, an attorney at Littler in Washington, D.C. But raising it to an annual level of $35,000 to $45,000 would be a lot more reasonable, she said.

The use of white-collar exemptions will become increasingly difficult if the final rule adopts the 40th percentile cutoff. “Each annual salary adjustment based on a percentage simply has the net result of rendering more exempt employees nonexempt,” said Paul DeCamp, an attorney at Jackson Lewis in Reston, Va.

The DOL is proposing two methods to automatically raise the salary threshold. The first would keep the level pegged to the 40th percentile—or some other percentile—of earnings for full-time salaried workers. The second would use the Consumer Price Index for All Urban Consumers to change the level based on inflation.

While the inflation-based approach has its drawbacks, they are not as severe as the percentile concept, DeCamp said.

Any automatic increase in salary level, however, would require employers to evaluate annually whether to raise the salaries of those who fall below the new minimum. For example, the new 2016 level would add an estimated 5 million currently white-collar employees. Regardless of the method ultimately chosen, employers should begin budget planning for annual increases.

Hard Choices

The proposed rule will require some hard choices, according to Michael Arnold, an attorney at Mintz Levin in New York City. Employers facing rising labor costs will be forced to ask:

• Do we pay our employees more to keep them exempt?

• Do we pay them less and/or reduce their hours to minimize overtime costs?

• Do we eliminate or reduce benefits provided to these previously exempt employees?

• Do we hire more workers to account for any shortfalls?

Employers may want to consider some cost-saving policies, such as permitting overtime work only with the permission of a supervisor (while paying overtime even when such a policy is violated, as required by law), imposing e-mail curfews to limit employees’ work time and redesignating the workweek. Changing the workweek to Wednesday through Tuesday, for example, may capture hours in a way that is less likely to incur weekly overtime wage costs than sticking with Sunday to Saturday.

While the DOL’s proposed rule would not modify the standard duties test used to determine whether an employee is exempt, the department has posed a series of questions to business leaders regarding how the test might be revised. As employers await the final rule, they are learning to live with uncertainty.

—Allen Smith, J.D.

DOL Questions About the Duties Test

Although the Department of Labor (DOL) did not modify the standard duties test for exempt status in its proposed overtime rule, the department has posed numerous questions and remains “very interested” in making it harder to meet, said John Thompson, an attorney with Fisher & Phillips in Atlanta. Inquiries include:

• What, if any, changes should be made?

• Should employees be required to spend a minimum amount of time performing work that is their primary duty to qualify for the exemption? And if so, what should that minimum be?

• Should the DOL look to California law as a model? That state requires that more than 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty. Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of today’s workplace?

• Does the single-standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the DOL reconsider its previous decision to eliminate the long duties test and short duties test structure?

• Is the concurrent duties regulation for executive employees—allowing the performance of exempt and nonexempt duties concurrently—working well, or does it need to be modified? Alternatively, should there be a limitation on the amount of nonexempt work that an exempt worker can perform? To what extent are exempt lower-level executive employees performing nonexempt work?

—Allen Smith, J.D.

Reference:
http://www.shrm.org/magazine

Retrieved: 2015, September