House Hearing Examines Proposal on Overtime Exemptions

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By Christine Pulfrey

Whether the duties tests used to exempt some executive employees from overtime should be rolled back and the accompanying salary threshold indexed were at the forefront of testimony at a House subcommittee hearing July 23 on a proposed rule to modify the exemption.

The Labor Department's proposed rule to extend the Fair Labor Standards Act overtime exemption for executive, administrative and professional employees, issued June 30 and published July 6 in the Federal Register (80 Fed. Reg. 38,516), would implement President Barack Obama's directive to modify rules to cover more workers. The rules were last updated in 2004.

Questions Answered, Raised

The proposed rule (RIN 1235-AA11) would increase the qualifying standard salary level to the 40th percentile of weekly earnings: Full-time salaried workers earning $970 a week, or $50,440 a year in 2016, would be eligible, up from $455 a week, or $23,600 a year, in 2015. The total annual salary required to exempt highly compensated employees would rise to the 90th percentile of weekly earnings, $122,148, up from $100,000.

The deadline for comments on the proposal, which is expected to be finalized in 2016, is Sept. 4.

The proposed rule’s intent to automatically update the salary level for inflation, and the questions it posed about changes needed to the duties tests, which under the department's 2004 rules governs the activities certain workers may engage in to qualify as exempt, figured prominently in the oral and written testimony of Tammy McCutchen, a labor and employment lawyer at Littler Mendelson P.C. who served as administrator at the Labor Department's Wage and Hour Division from 2001 to 2004, and Ross Eisenbrey, vice president at the Economic Policy Institute.

Indexing the salary level “is not in keeping with historic practice,” McCutchen said in written testimony. “Both Congress and previous administrations have explicitly declined to include automatic increases.”

Eisenbrey, in written testimony, said: “There is no cogent economic reason not to adjust this salary cap for wage growth or inflation.”

Employment and policy experts differ on whether to retain, repeal or revise the 2004 changes  to the duties tests.

“The salary threshold must be indexed so it increases without political intervention, and indexing is well within the department's authority,” Eisenbrey said. “What seems like a big increase in the threshold is simply employers who got used to a loophole for far too long,” he said.

Revising the Duties Tests

Despite not proposing changes to the duties tests, the department “is signaling that it intends to make some modifications such as adding a quantification requirement similar to California’s where an employee must be performing exempt duties more than 50 percent of their time,” McCutchen said.

“The department is also suggesting it may eliminate the ‘concurrent duties’ provision that lets an exempt employee also perform nonexempt tasks without jeopardizing their exemption,” McCutchen said.

“If changes are to be made to the test, a full comment period is warranted,” McCutchen said. “Without providing proposed regulatory text for these changes, the department is not giving affected parties an adequate opportunity to understand what changes may be made and provide comments on them.”

“The 2004 duties tests permit employers to game the rules and deny overtime to workers who should not be exempt,” Eisenbrey said. “The ‘team leader’ provision, for example, assumes managerial responsibilities for team leaders on ‘major projects’ and grants exemptions when those responsibilities are deemed sufficiently important to the employer—a completely subjective determination.”

“Explicit limits on the time that exempt employees may spend performing nonexempt duties would provide far more guidance than vague tests based on the employer’s subjective feelings about the importance of one duty compared with another,” Eisenbrey said.

The rules as they initially existed after the FLSA was passed “reflected an understanding that an exempt employee should do no substantial amount of nonexempt work and should in no case devote more than 20 percent of her time to such duties,” Eisenbrey said.

A Wrinkle in Enforcement

The Labor Department's new administrator's interpretation “further defining the terms ‘suffer or permit to work’” in the context of misclassification adds “another wrinkle” to the department’s enforcement activities, including those for overtime, McCutchen said.

“As many of these investigations are triggered by questions of whether the worker was properly compensated under the overtime regulations, the addition of this new AI will further increase the number of overtime enforcement actions,” she said.

The department's 2004 rule put out the promise that it would reduce litigation, but litigation tripled, Eisenbrey said. As proposed, the new rule modifying the white-collar overtime exemptions is as simple as it could be, avoiding litigation because of confusion about whether a worker is exempt.