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In a July 2015 interview, Alexander Passantino discusses the U.S. Department of Labor's proposed new overtime rules, how they could potentially impact both workers and businesses, the rules' potential pitfalls and how litigators can advise their employer clients going forward.
Alexander Passantino (email@example.com) is a partner at Seyfarth Shaw LLP in Washington, DC, where he also serves as the office leader for the firm’s Wage and Hour Litigation Practice Group. He also served as the Deputy and Acting Administrator of the U.S. Department of Labor, Wage and Hour Division from 2006 until 2009. His current practice focuses on employer-side wage and hour law covering all aspects of the Fair Labor Standards Act and corresponding state statutes. He is admitted to practice in Georgia, Tennessee and the District of Columbia, as well as the United States District Courts for the District of Columbia, the Eastern, Middle, and Western Districts of Tennessee, the Northern and Middle Districts of Georgia, and the Eastern District of Michigan; the United States Court of Appeals for the Fifth, Sixth, and Eleventh Circuits; and the United States Supreme Court.
[Editor's note: On June 30, 2015, Labor Secretary Thomas E. Perez announced the details of the U.S. Department of Labor’s proposed rule to address overtime pay protections under the Fair Labor Standards Act. Under the proposed rule, the salary threshold for overtime pay eligibility would be raised to include workers who earn below $50,440 per year, or $970 per week. Perez has estimated that the new rule would make approximately 5 million additional workers eligible for overtime pay, with other estimates outside the DOL going as high as 15 million additional workers. The issue of overtime pay for low-wage workers has been a high priority labor issue for President Barack Obama, who ordered the DOL to come up with an updated rule making more workers eligible for overtime pay in March 2014. Currently, the rule governing the FLSA overtime protections only allows those making less than $455 a week to be eligible for these protections, an amount that comes out to a salary of $23,660 a year. The rule currently covers approximately 3.3 million salaried workers in the retail and restaurant industries alone.]
What factors prompted the DOL to make significant changes to the rules governing overtime eligibility under the FLSA?
The President’s Memorandum from March 2014 stated his belief that the regulations were outdated and directed Secretary Perez to propose revisions, and in doing so, to “consider how the regulations could be revised to update existing protections consistent with the intent of the Act; address the changing nature of the workplace; and simplify the regulations to make them easier for both workers and businesses to understand and apply.”
The current proposal contains actual revisions to the salary levels for the “regular” minimum salary required for exemption, as well as for the exemption related to highly compensated employees. It contains no other proposed text, although there are several questions asked by the Department that indicate that it is considering additional changes that will make the final rule significantly different from what has been proposed.
Because there are so many permutations of what “might” happen in the final rule, I’m going to focus on what has actually been proposed.
The increase to the minimum salary is substantial -- it would more than double the current standard, and it would exceed the current minimum salaries required under California and New York state law. That is, the Department of Labor believes that the minimum standard for the entire country should be higher than the legislatures of New York and California think it should be in their high-cost-of-living states.
Besides the increased salary threshold, what are the most significant proposed changes to the FLSA overtime rules?
The only proposed language in the Notice of Proposed Rulemaking (NPRM) relates to the salary level. The Department, however, is also proposing to automatically increase the salary level based on one of two different methods: basing it on the 40th percentile of salaried, full-time employees; or indexing it to inflation through the Consumer Price Index for All Urban Consumers (CPI-U). In addition, the Department is considering whether to allow employers to use nondiscretionary bonuses to satisfy some portion of the salary level.
The Department is also asking for comments on the duties tests, although it did not make specific proposals. The questions on which the Department seek input are:
• What, if any, changes should be made to the duties tests?
• Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?
• Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model? Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?
• Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the Department reconsider our decision to eliminate the long/short duties tests structure?
• Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?
In addition to these questions, the Department also asks whether providing examples interpreting the regulatory provisions would be helpful, and, if so, solicits ideas for additional examples.
How are these changes expected to impact the average American worker?
It’s too early to tell. Secretary Perez has been touting this as a $1.2 billion raise, but the Department’s own analysis suggests that only 71,000 people will get salary increases. Surely, some employees who do not get raises will get some overtime pay, but, at this point, everyone is still trying to figure out what to do.
This is not a minimum wage increase where everyone making below the new rate must be raised. Employers will need to review the employees in the affected classifications (i.e., those in the “gap” between the old salary level and the new salary level) and make determinations of how to proceed based on what makes the most sense from an operational perspective.
So, for the average American worker, it remains to be seen what the impact of this rule may be -- some may get a raise; some may get no additional pay, but now have to record their hours; and some may see a decrease in their pay, at least in some weeks.
Some may also see a decrease in benefits (or increase in their own out-of-pocket costs), either because they are now in their employer’s nonexempt plan or because their employer makes changes to exempt benefits plans in the future to “offset” in some way the increase in pay.
And, according to DOL, the overwhelming majority of America’s 122 million workers will be largely unaffected by this change.
How are these changes expected to affect the way employers run their businesses?
Again, it’s too early to tell. It will depend on the employer and the position being considered. An employee earning $49,000 is more likely to get a raise to maintain the exemption than would an employee earning $40,000 (assuming both otherwise meet the duties tests).
But different companies may handle similar roles differently -- for example, deciding that the administrative expense and overtime costs do not merit the required increase in pay and converting to non-exempt; or determining that the company needs the flexibility afforded the exempt employee means they have no choice but to raise the salary.
For those currently exempt employees between $23,660 and $50,440, there really is no bright-line test on how to handle.
It is reasonable to expect, however, that there will be numerous positions that will be non-exempt for the first time in a company’s history and the employer will need to deal with the operational and decreased morale issues associated with that.
Getting someone who has never kept track of their time before to start tracking their time is not nearly as easy as it seems.
Based on the information available, do you believe that the proposed rules strike a fair balance between the concerns of both workers and employers?
I believe that most employers would say that a modest increase to the minimum salary level is OK. This proposal, however, swings much too far in the other direction. I believe that the proposed salary increase is much too high and would have to be implemented much too quickly for such a large increase.
That being said, I also believe that most employers would prefer the proposed increase to a lower increase tied to a change in the duties test, which is what most employers fear is the Department’s intention with its stealth proposal (i.e., the use of questions instead of proposed regulatory text). So, if putting employers between a rock and a hard place is “balance” . . .
Many employers and employer advocacy groups have claimed that the expected rule changes will have a significantly negative impact on the average American worker and on the American economy as a whole. Are their concerns warranted?
The way that the Department decided to go about this rulemaking has created an intense uncertainty among employers. If the Department had simply said “here is a proposed salary increase, here is our proposal to increase the salary level on an annual basis,” the negative impacts of the rule may have been limited. Employers are creative and, given sufficient time, can figure out how best to implement regulatory changes in a way that has the least negative impact.
That being said, many employees will lose flexibility in their schedules, guaranteed pay, opportunities for advancement, and a variety of other benefits; and, operationally, someone, somewhere is going to have to pick up the slack if an employee is no longer permitted to work more than 40 hours. So, it seems that even the current proposal would have an overall negative impact.
The real issue, however, is the elephant in the room -- potential revisions to the duties tests. The Department spent more than a year talking about the possibility of duties tests revisions, but then chose not to include actual proposals in the NPRM. However, it also did not rule out the possibility of changes to the duties test.
The possibility that the Department will, at the end of the process, make revisions -- perhaps significant revisions -- to the duties tests has caused great uncertainty. As employers consider whether to reclassify employees or raise their salary (or, as we’ve started to hear, to eliminate their position), most of them are concerned that they will need to take another look when the final rule is published.
Given the time, energy, and expense that goes into the process, they are not interested in going through the process twice. Many employers will wait until the final rule, which means they will have a far more limited time to implement the changes, and will almost certainly do so less creatively than if they knew what the Department had planned -- at least in a proposed format -- now.
This will almost certainly result in negative consequences for employees and the economy as a whole. As employers are preparing their 2016 budgets, they will do so with the specter of significant changes to the duties tests in their minds. Raises and bonuses may be limited because the employer needs to plan for the possibility not only that the salary increase will be raised, but also that other classifications of employees will need to be converted to non-exempt status, and, without sufficient lead time to implement that conversion, it likely will be significantly more expensive.
The Department could have taken the duties test off the table and eliminated this uncertainty, allowing employers to get creative in their compensation plans for 2016. By refusing to take the issue off the table, their proposal puts everyone in a holding pattern until the Department finally tells everyone what the rule will be.
If the Department was interested in minimizing the negative impact of their proposal, they should issue a supplemental NPRM containing actual proposed regulatory text on duties test issues or expressly state that they will treat their questions as a Request for Information or Advanced NPRM, and will not issue final rules from the questions without providing the regulated community with the opportunity to comment on a specific proposal. Either one of those options -- and probably others -- would allow employers the certainty they need to proceed.
How can litigators best advise their employer clients in anticipation of these rule changes?
First, employers should really focus on current classification issues. The overtime exemption issue has gotten more media attention over the past 30 days than any time I can remember. Employees’ interest in the issue is likely to be piqued and I suspect it will result in more questions about their status. If an employee doesn’t get the “right” answer to those questions, he or she may go talk to a lawyer or the Department of Labor. So, ensuring current compliance is key.
Second, employers may use this opportunity to provide “cover” for reclassification decisions. If there are positions that the employer has been worried about from an FLSA exemption perspective, this high-profile proposal may allow an employer to make the switch to non-exempt and, essentially, blame it on the government. Employers should be looking for these opportunities.
Finally, employers should be paying attention to the regulatory developments at DOL, but they also need to make sure their voices are being heard. Whether that is sending in a comment to the regulatory record, or attending the town hall meeting of a Member of Congress to let her know how the rule may impact the employers -- and thus employees -- in her district, employers need to speak up.
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