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Obama Signs Memo Telling DOL to Update, Streamline White-Collar Overtime Exemption

Friday, March 14, 2014

By Chris Opfer and Gayle Cinquegrani  

March 13 --As expected, President Barack Obama issued a memorandum March 13 directing the Labor Department to streamline overtime regulations and make more workers eligible under federal law.

Specifically, the presidential memorandum tells DOL Secretary Thomas Perez to consider how the white-collar overtime exemption adopted by the DOL under the Fair Labor Standards Act could be simplified and updated to address the changing nature of the American workplace.

The memo is intended to publicize Obama's latest effort to sidestep legislative hurdles in Congress on key employment and income policies. It's already drawing the ire of Republican lawmakers and poses significant questions for employers likely to be affected, attorneys and other sources told Bloomberg BNA.

In a ceremony at the White House, Obama said he wants “to restore the commonsense principle behind overtime--if you go above and beyond to help your employer and your economy succeed, then you should share a little bit in that success.”

The FLSA requires employers to pay most employees overtime pay at time and one-half their regular pay rate for the hours they work in excess of 40 in a workweek.

However, the white-collar exemption, found in Section 13(a)(1) of the FLSA, provides an exemption from overtime pay for those employed as bona fide executive, administrative, professional and outside sales employees.

To qualify for the white-collar exemption, employees must be paid at least $455 per week on a salary basis, and their job duties must meet specific tests--such as including managerial or supervisory responsibility or requiring advanced knowledge or independent judgment.

The white-collar exemption's low salary threshold means that “unfortunately, today, millions of Americans aren't getting the extra pay they deserve” because “an exception that was originally meant for high-paid, white-collar employees now covers workers earning as little as $23,660 a year,” Obama said.

“Today, I'm going to use my pen to give more Americans the chance to earn the overtime pay that they deserve” as part of the administration's agenda to ensure “that our economy rewards the hard work of every American,” he said.

In February, Obama signed an executive order requiring federal contractors to pay their employees at least $10.10 an hour .

The Rulemaking Process

The initiative to update the exemption would be subject to the normal rulemaking process, which requires the Labor Department to formally propose a rule, give the public an opportunity to comment, consider making revisions based on those comments, await clearance of the rule by the White House Office of Management and Budget, and then issue the final rule.

At the signing ceremony, Obama said the Labor Department would “do this the right way.”


The rulemaking process will take “a year to 18 months,” Tammy McCutchen, a shareholder at Littler Mendelson in Washington, said. McCutchen headed the DOL Wage and Hour Division when the exemption was last revised in 2004. “Certainly they have time to do it before the end of the [Obama] administration,” she said.  

 


“[W]e're going to consult with both workers and businesses as we update our overtime rules,” he said. “We're going to work to simplify the system so it's easier for employers and employees alike.”

The rulemaking process will take “a year to 18 months,” Tammy McCutchen, a shareholder at Littler Mendelson in Washington, told Bloomberg BNA March 12. McCutchen headed the DOL Wage and Hour Division when the exemption was last revised in 2004. “Certainly they have time to do it before the end of the [Obama] administration,” McCutchen predicted.

In 2004, the Bush administration raised the minimum salary threshold for the white-collar exemption from $155 a week to $455 a week and changed some of the requisite job duties. The $155 amount, set in 1975, is the equivalent of $970 in today's dollars, and the $455 amount would have been worth $553 in today's dollars when it was established in 2004.

The previous revision of the exemption generated a great deal of controversy. The DOL received more than 80,000 public comments about its proposal in 2003. And some Democratic legislators threatened to derail the department's funding for fiscal year 2004 because they feared the proposed rule would cause 8 million workers to lose their eligibility for overtime.

Most Questions Concern Duties

While it's still unclear just what changes the Labor Department will ultimately make to the white-collar exemption requirements, management-side attorneys say that the revisions are likely to come at a significant expense to employers.

Employers will have to review how they classify workers for overtime purposes and consider paying certain workers more money in order to retain their exempt status, the attorneys said.

“Many employers are going to face substantial additional costs,” Cindy Schmitt Minniti, a partner in Reed Smith's labor and employment division in New York, told Bloomberg BNA March 13. “They will have to re-examine their workforce and go through the process of reviewing classifications and tracking overtime hours.”

The deal may look good on paper to employees, but Minniti said that raising the threshold income requirement for the exemption may simply force employers to cut hours for many workers who would now be entitled to overtime pay.

Minniti said it's “almost a guarantee” that the Labor Department will increase the exemption's income threshold. But she said changes in the types of duties considered supervisory or a requirement that workers devote a specific amount of their time on the job to such duties would be likely to spur litigation.

She said most classification questions concern the worker's duties rather than pay. These questions are highly fact-specific, she said, and are regularly the subject of litigation.

“If you're going to specify a percentage of time that must be spent on supervisory work, that becomes a fact question and that's difficult for both employers and workers to prove,” Minniti.

Tamara Devitt, a partner at Haynes and Boone LLP in Irvine, Calif., said her state's overtime law would be a good model if the DOL chooses to quantify the amount of time exempt employees must spend on supervisory work so that it qualifies as their primary duty.

While the state law requires workers to spend at least 50 percent of their time on the job performing exempt duties, Devitt said she's not sure whether a similar provision in the FLSA regulations would mean a significant change in the way the law is currently applied.

“These are often fact-specific questions about the duties workers perform,” Devitt said, adding that many federal courts are already likely to look at a worker's proportion of supervisory duties in considering whether the FLSA's white-collar exemption applies.

Opponents Looking to Elections

Meanwhile, Republican lawmakers and business leaders have chastised the president for his continued pledge to act unilaterally when necessary to push through certain economic and employment policies.

“This is probably largely a political exercise, rather than something that's seriously broken and overdue for reform,” David French, National Retail Federation senior vice president, told Bloomberg BNA March 13. “I think the president is trying to find ways to drive his agenda without going through Congress.”

A Republican Senate aide told Bloomberg BNA March 13 that the party is seeking to use what it characterizes as the president's heavyhanded, job-killing initiatives as fodder for the upcoming election seasons.


Most classification questions concern the worker's duties rather than pay, according to Cindy Schmitt Minniti, a partner at Reed Smith. “If you're going to specify a percentage of time that must be spent on supervisory work, that becomes a fact question and that's difficult for both employers and workers to prove,” she said.  

 


“This administration has never bothered with courtesy, so Congress rarely knows what they're up to over there until after the fact,” the aide said. “As far as the policy goes, it's as if they sit around looking for ways to make job creation and economic growth more difficult, all in the name of scoring political victories with their base,” he added. “Given their predilection for going around Congress at every turn, our only recourse is the 2014 and 2016 elections.”

Legal, Legislative Challenges Possible

Professor Peter Strauss, who teaches administrative law at Columbia University, told Bloomberg BNA March 13 that the Labor Department generally has discretion to implement regulatory changes such as those related to overtime pay under the FLSA.

Nevertheless, Strauss said opponents of the changes can attempt to challenge or undermine the new regulations, whether in court or at the U.S. Capitol.

Strauss pointed to two labor and employment decisions by the U.S. Supreme Court--NLRB v. Health Care & Retirement Corp. of America, 511 U.S. 571 (1994) and Vance v. Ball State University, 133 S. Ct. 2434, 119 FEP Cases 1481 (2013)--as examples of cases in which the high court struck down an agency's interpretation of statutory language.

In Health Care, the court widened the National Labor Relations Board's definition of the term “supervisor” for purposes of the National Labor-Management Relations Act. In Vance, the justices narrowed the Equal Employment Opportunity Commission's long-standing definition of the supervisory relationship for vicarious liability purposes under Title VII of the 1964 Civil Rights Act.

“These decisions could be seen as the court's growing inclination to favor employers or growing confidence that it can explain statutory concepts without worrying about other people's interpretation of them,” Strauss said.

He added that the Labor Department is more susceptible to challenge if it tinkers with the types of duties covered under the white-collar exemption than if it simply focuses on the income threshold.

“Courts will have difficulty objecting to a change in qualifying income levels, but if what the Secretary of Labor is going to do now is exclude from the definition of white collar employees types of people who have up until now been so classified, one runs into the same buzz saw,” Strauss said.

He added that lawmakers who oppose the changes can seek to undermine them though the appropriations process. “It's not impossible that someone would slip into an omnibus appropriations bill a provision saying that none of the money can be used to implement departmental consideration of the proposed rulemaking,” Strauss said. “That would prevent progress on the rule every year such a provision was enacted.”

 

To contact the reporters on this story: Chris Opfer in Washington at copfer@bna.com; Gayle Cinquegrani in Washington at gcinquegrani@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com


Text of the presidential memorandum is available at http://op.bna.com/dlrcases.nsf/r?Open=copr-9h6scd.

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