Department of Labor’s Proposal to Expand Overtime Pay

Memorandum
Department of Labor’s Proposal to Expand Overtime Pay
_____________________________________________________________________________
ISSUE: Department of Labor’s proposal to update and revise the regulations issued under the Fair
Labor Standards Act (FLSA) to expand the number of employees eligible for overtime
pay.
ANALYSIS: On March 13, 2014, President Obama signed a Presidential Memorandum directing the
Department of Labor (DOL) to update regulations defining which white collar workers
are protected by the FLSA’s minimum wage and overtime standards. President Obama
emphasized his intent to revise these regulations in his 2015 State of the Union Address
last January.
On June 30, the DOL unveiled its draft proposal to broaden federal overtime regulations
that will significantly increase the amount of employees eligible to receive overtime pay.
Businesses and other members of the public have the chance to submit comments
regarding the DOL’s proposal for the next sixty (60) days which the DOL stated it will
consider before finalizing the proposal.
I. Fair Labor Standards Act (FLSA)1
The FLSA guarantees a minimum wage and overtime pay at a rate of not less than one
and one-half times the employee’s regular rate for hours worked over 40 in a workweek.
While these protections extend to most workers, the FLSA does provide a number of
exemptions. Section 13(a)(1), which excludes certain white collar employees from
minimum wage and overtime pay protections, was included in the original Act in 1938.

This exemption for executive, administrative, professional, outside sales, and computer
employees is referred to as the FLSA’s “white collar” exemption. The white collar
exemption was premised on the belief that the exempted workers earned salaries well above
the minimum wage and enjoyed other privileges, including above-average fringe benefits,
greater job security, and better opportunities for advancement, setting them apart from
workers entitled to overtime pay. Furthermore, and most relevant to the current situation, the
statute delegates to the Secretary of Labor the authority to define and delimit the terms of the
exemption.

1. The FLSA applies to all enterprises that have employees engaged in commerce or in the production of goods for commerce and have an annual gross volume of sales made or business done of at least $500,000.
II. Current “White Collar” Exemption Requirements:
To be exempt from overtime pay, an employee must generally meet the following threepart test:
1. The “Salary Basis Test”
a. The employee must be paid a predetermined and fixed salary that is not subject to
reduction because of variations in the quality or quantity of work performed;
2. The “Salary Level Test”
a. The amount of salary paid must meet a minimum specified amount 2 (currently
$455 per week or $23,660 per year for a full-year worker); and
3. The “Duties Test”
a. The employee’s job duties must primarily involve executive, administrative, or
professional duties.

2. This amount was last update in 2004 and is what the DOL is seeking to update in its proposal
III. Current Exemption for Highly-Compensated Workers
The current regulations also contain a special rule for “highly-compensated” workers
who are paid total annual compensation of $100,000 or more. A highly compensated
employee is deemed exempt if:
1. The employee earns total annual compensation of $100,000 or more; and
2. The employee’s primary duty includes performing office or non-manual work; and
3. The employee customarily and regularly performs at least one of the exempt duties or
responsibilities of an exempt executive, administrative or professional employee.
IV. DOL’s New Proposal
The DOL proposes to update and revise the regulations in order to set the standard salary
level equal to the 40th percentile of earnings for full-time salaried workers. This would be an
adjustment of the standard salary level from the current amount of $455 per week or $23,660
per year for a full-year worker to a projected amount of $970 per week, or $50,440 annually
for a full-year worker, based on 2016 data.
The DOL is also proposing to set the highly compensated employee annual compensation
level equal to the 90th percentile of earnings for full-time salaried workers (at a projected
amount of $122,148 annually with at least the standard salary level paid on a salary or fee
basis).
Furthermore, in order to prevent the levels from becoming outdated, the DOL proposes to
include in the regulations a mechanism to automatically update the salary and compensation
thresholds on an annual basis loosely based on a cost of living adjustment.
V. Potential Other Changes:
The proposed modifications to the overtime pay rule are significant, but many related
issues remain unresolved and could be addressed in the near future, such as:
1. The Job Duties Test
a. The current proposed rule did not alter the current job duties test. However,
the DOL is considering whether revisions to the duties test are necessary in
order to ensure that these tests fully reflect the purpose of the exemption. The
DOJ is considering revisions including requiring an overtime-ineligible
employee to spend a specified amount of time performing their primary duty
or otherwise limiting the amount of nonexempt work his employee may
perform, and adding examples to illustrate how the exemption may apply to
certain occupations.
2. Inclusion of Bonuses
a. The DOL will also consider whether to allow nondiscretionary bonuses, such
as certain production or performance bonuses, or commissions to partially
satisfy a portion of the standard test salary requirement in order to determine
eligibility or exemption from overtime pay requirements. However, the DOL
is not considering expanding the salary level test calculation to include
discretionary bonuses, payments for medical, disability, or life insurance,
contributions to retirement plans or other fringe benefits.
3. Working on Electronic Devices after Hours
a. In its initial discussion with the public about updating the overtime law, the
DOL was asked to determine whether employees should be compensated for
time spent on devices such as smartphones and laptops, doing work after
hours. While the DOL did not address that question in the proposed rule, it did
state it would seek additional input on the use of electronic devices by overtime protected employees outside of scheduled work hours in the near future.

CONCLUSIONS:
A drastic change to the standard salary level is coming and is projected to take effect in
2016. We believe the number will be below the $50,440 but likely not by much. Also,
remember that if an employee is close, his or her salary will not include a discretionary
bonus. The DOL is currently taking public comments into consideration to determine if
the new standard salary level should be equal to the 40th percentile of earnings for full-time
salaried workers or some different amount.
An analysis of the current salary and duties of all employee should be conducted to determine
the potential financial and administrative impact and to avoid running afoul of the revised
law. Ultimately, it becomes a numbers game and we must determine whether it makes more
sense to pay lower income office workers overtime or to raise their income in a sufficient
amount to comply with the new law in 2016.

Source: Becker & Lily, LLC