Employment & Labor Update - Executive Order to Bring Changes to FLSA Overtime Exemption Regulations


On March 13, 2014, President Barack Obama directed the Secretary of the U.S. Department of Labor to promulgate new rules concerning the Fair Labor Standards Act (the “FLSA”).  These new rules will significantly raise the bar for certain employees to qualify as exempt from overtime pay requirements under the FLSA.

The Department of Labor has yet to issue new rules in response to the directive, and so far there is no set timetable for issuing such rules. However, the Secretary of Labor has provided insight as to what employers can expect. The anticipated changes will likely result in many employees, currently classified as “overtime-exempt” (under the so-called “white collar exemptions” -- i.e., with executive, administrative, and professional employees), losing their exempt status. These changes are likely to be felt most heavily in the retail and hospitality sectors, but will have an impact on all those positions, currently classified as exempt, that have relatively low salaries or that have carried a mixture of exempt and non-exempt duties. Employers should prepare now by reviewing those positions currently classified as exempt, and assessing the impact if they become required to track all hours worked and to pay overtime premiums to those employees losing exempt status.

The Anticipated Rule Changes

Currently, to qualify for a white collar overtime exemption, an employee must satisfy two tests – the “salary basis test” and the “duties test.”  Both tests will be heightened by the predicted rule changes. The Department of Labor has not changed these rules since 2004.

The Salary Basis Test – The New Rules Will Raise The Minimum Salary Threshold Necessary To Qualify As An Exempt Employee.

Under current regulations, to qualify for the overtime exemption, an employee must earn a minimum salary of at least $455 per week. Under the anticipated new regulations, the minimum salary is expected to rise to as much as $900 per week. With such a dramatic increase in the minimum salary threshold, a large number of employees who are currently properly classified as overtime-exempt will automatically lose their exempt status.

The Duties Test – The New Rules Will Create A New Threshold, Requiring That Management Duties Take Up The Majority Of The Exempt Employee’s Time.

The Department of Labor is also expected to significantly change the duties test that determines who qualifies for the “executive” exemption. Currently, the rules call for a multifactor analysis of an employee’s “primary” duties, and provide that an employee is qualified for exempt status if the employee’s “primary” duties are “exempt duties.” These “exempt duties” include the direct management of other employees, such as hiring, firing, disciplining, training, scheduling, or supervising. At present, some exempt managers spend significant portions of their workday performing traditionally non-exempt duties, such as stocking shelves or servicing customers, while also spending some lesser period of time managing other employees and carrying out exempt duties. Under current regulations, these “working” managers may be properly classified as overtime-exempt, because the existing regulations define an employee’s “primary” duty as the employee’s principal, main, major or most important duty, even if the employee performs such management duties less than 50-percent of his or her working time.

The new regulations will likely require that an exempt executive employee perform “exempt duties” during more than 50-percent of his or her working time. The anticipated establishment of a 50-percent threshold under the new regulations will mean that many managerial employees, currently properly classified as exempt managers, will lose their exempt status, or that there will be heightened scrutiny of how much time they actually spend on managerial duties. Thus, the anticipated new regulations will also increase the burden on employers to monitor the nature and duration of the tasks their managers perform, in order to substantiate that more than half of that time is devoted to exempt duties.

Take Away

Regardless of the final thresholds contained in the new rules, the clear result of the changes will be the reclassification of a significant number of employees to overtime non-exempt status. Due to the increased cost of overtime labor, employers may need to reevaluate staffing levels to limit overtime, and consider decreasing employee compensation to manage overtime costs. Employers will also need to prepare to track employee hours and satisfy certain recordkeeping requirements. 



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