Overtime Proposed Rule Would Make Workers Earning Below $50,440 Eligible

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By Gayle Cinquegrani

June 30 — More than 5 million additional workers would have to be paid for their overtime hours under a long-anticipated proposed rule unveiled by the White House June 30 to ensure that an exemption intended for highly paid executives is not used to underpay low-level supervisors.

“Today all too many managers are working hard and falling behind,” Labor Secretary Thomas Perez said during a White House press call. “This rule goes to the heart of what it means to be middle-class in America” by ensuring “that people who work extra get paid extra.”

The proposed rule would more than double the salary workers must be paid before they can be considered exempt from the Fair Labor Standards Act requirement to be paid one and one-half times their normal pay rate for work hours exceeding 40 in a workweek. The current salary threshold for overtime eligibility is $455 a week, or $23,660 per year.

The proposal would set the salary threshold at the 40th percentile of earnings for full-time salaried workers, as determined by DOL's Bureau of Labor Statistics. That amount is projected to be $970 per week or $50,440 per year in 2016, when the threshold increase likely would occur.

The proposal also calls for indexing “to guard against the erosion” of the salary threshold, Perez said. The Labor Department is asking for input as to whether the threshold should be indexed to a fixed percentile of earnings or the consumer price index.

DOL Undecided Whether to Change Duties Test

The department left open the question whether the duties tests in the current regulations should be revised. The so-called white-collar exemption, found in Section 13(a)(1) of the FLSA, provides an exemption from overtime pay for workers in bona fide executive, administrative, professional and outside sales positions.

To qualify for the white-collar exemption under the current regulations, in addition to meeting the salary threshold, an employee must have duties that are managerial or supervisory or require advanced knowledge. In the proposed rule, the DOL is seeking feedback on a series of questions that will help it decide “what changes, if any,” it will make to the duties test, Perez said.

The labor secretary said that during DOL's outreach sessions, he heard a range of salaries earned by frontline managers who currently do not get paid overtime, but the “most frequent answer we got was in the low to mid 40s.” Under the proposed rule, employers would have to raise the salary for these employees above the $50,440 threshold or pay them for overtime.

Perez estimated the proposed rule would affect 5 million workers during the first year and put an additional $1.2 billion to 1.3 billion “in their pockets.” If employers choose to reduce these employees' workload rather than pay them overtime for extra work hours, the workers would receive “an equally precious gift—the gift of time” that they could spend with their families, the labor secretary said. He added that businesses probably will have to hire more workers to cover the hours that many frontline managers have been working for free.

The proposed rule would more than double—to $50,440 from $23,660 per year—the salary workers must be paid before they can be considered exempt from the FLSA requirement to be paid one and one-half times their normal pay rate for work hours exceeding 40 in a workweek.

The Labor Department began the rulemaking in response to a March 2014 order from President Barack Obama to modernize overtime regulations.

A DOL spokesman told Bloomberg BNA June 30 the department expects the proposed rule to be published in the Federal Register July 6, with the 60-day period for public comments ending Sept. 4.

‘Moderate Increase' in Salary Threshold

Seth Harris, a former acting labor secretary and deputy labor secretary during the Obama administration who now practices law at Dentons and teaches at Cornell University, told Bloomberg BNA June 30: “It's apparent to me that a decision was made to focus attention on the salary threshold,” which he called “a moderate increase” compared with “some of the proposals advanced by advocacy groups.”

“My prediction is that they will not alter the substantive duties test,” Harris said. Doing so after failing to put forth specific changes in the proposed rule could open the door to a legal challenge, he said.

“The task” for the department is to finish the rulemaking process and make it effective before the arrival of the next administration, particularly if a Republican wins the White House, Harris said.

Judy Conti, the National Employment Law Project's federal advocacy coordinator, told Bloomberg BNA the best way the Labor Department “could protect the most people was to raise the salary threshold, and they did that—significantly.” NELP says its mission is support the interests of low-wage workers and the unemployed. “When you put in a significantly high threshold, you root out some of the faux managers” who might have been designated managers by employers to qualify them undeservedly for the white-collar overtime exemption, Conti said.

“This is a win-win. It will create more jobs” and workers will get either higher wages or more hours, she said.

Economic Impact on Small Businesses

Lee Schreter, the chair of the board of directors of Littler Mendelson and co-chair of the firm's wage and hour practice group, told Bloomberg BNA June 30 the proposed rule will have “a profound economic impact on a lot of businesses,” especially small ones. “The salary proposals are quite high” for some regions of the country, such as the South and the Midwest, she said.

“I think there's going to be a lot of speculation” about why the Labor Department left the duties test so open, Schreter said. “I am concerned that by asking for employers to comment without giving them concrete proposed duties … , the department is attempting an end-run around the duties test.”

“We understand there will be a vigorous conversation” in reaction to the proposed rule, White House Domestic Policy Council Director Cecilia Munoz said during the White House press call. Nevertheless, “[t]his is a rule that is totally within the department's regulatory authority,” she said. “We're looking forward to the rule going final next year.”

Comments should be identified by Regulatory Information Number (RIN) 1235-AA11. They may be submitted electronically through the federal e-rulemaking portal at http://www.regulations.gov or mailed to Mary Ziegler, director of the Division of Regulations, Legislation, and Interpretation at the Wage and Hour Division, U.S. Labor Department, Room S-3502, 200 Constitution Ave., N.W., Washington, D.C. 20210.

To contact the reporter on this story: 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 proposed rule is available at http://op.bna.com/dlrcases.nsf/r?Open=gcii-9xylpr.