Labor Department Proposes Higher Overtime Threshold, More Than Doubling Salary Levels

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By Christine Pulfrey and Michael Trimarchi

Salaried workers earning up to $970 a week in 2016 would be eligible for overtime premiums, up from $455 a week in 2015, under proposed rules issued June 30 by the Labor Department.

The proposed rules, coming 15 months after President Barack Obama called for an update to overtime regulations, would nearly double the annual overtime threshold to $50,440 in 2016 from $23,660 a year in 2015. The threshold was last updated in 2004.

The total annual compensation required to exempt highly compensated employees would rise to $122,148 a year from $100,000, and a means of automatically updating the salary and compensation levels each year also would be established under the proposal.

To be considered exempt from overtime, employees must meet certain minimum tests related to primary job duties and be paid on a salary basis at not less than a specified minimum amount, the department said. 

The proposed rule would extend overtime protections to nearly 5 million white-collar workers within the first year of its implementation, the Labor Department said June 30.

Salary levels would be automatically updated each year either by maintaining the levels at a fixed percentile of earnings or by updating the amounts based on changes on the consumer price index for all urban consumers (CPI-U), according to the proposed rule.

The Labor Department “is considering whether revisions to the duties tests are necessary in order to ensure that these tests fully reflect the purpose of the exemption,” the proposal said.

In addressing the duties tests, Labor Secretary Thomas Perez said the proposal does not make a specific change to the current tests for determining whether a worker is eligible for overtime premiums or exempt.

“However, the proposed rule asks a series of questions about the adequacy of the standard duties test in terms of protecting eligible workers,” Perez said June 30 during a White House teleconference. “The answers that we receive from these questions and the overall comments that we receive will help inform what changes, if any, are made to the duties test.”

Perez also said that the proposed salary level was chosen after reviewing evidence used to set the threshold, which was based on the 40th percentile for full-time salaried workers. “This figure is a good proxy for the line that separates overtime exempt employees from overtime eligible employees,” he said.

The proposed rule was reviewed and approved by the federal Budget Office and is soon to be published in the Federal Register. A 60-day comment period is to follow publication, Perez said.

Wage Qualifications

The FLSA generally requires employers to pay most employees time and one-half the regular pay rate for hours worked in excess of 40 in a week. However, they can qualify as exempt executive, administrative and professional employees who earn a weekly salary of at least $455 and have job duties that include managerial responsibilities or require the use of advanced knowledge.

“Updating the statute's executive, administrative and professional exemptions is the Labor Secretary's responsibility or duty, and it was exercised from time to time in 1938, 1940, 1950, 1959 and on and on,” Ross Eisenbrey, vice president of the Economic Policy Institute, said June 30 during a teleconference sponsored by four advocacy and economic groups.

The regulations were last revised in 2004, when the administration of President George W. Bush raised the minimum qualifying salary level to $455 a week from $155 a week and changed some of the requisite job duties.

“In historical terms, [the rule] is correcting a loss of labor standards and restoring pretty much the kind of coverage back in the 1970s, but not completely,” Eisenbrey said, noting that in the 1970s “more than 60 percent of salaried workers were protected and guaranteed overtime pay.”

The Obama administration “decided 40 percent of salaried workers is the appropriate threshold” and to adjust that threshold going forward “so that we never go through this enormous erosion of coverage that we have had,” Eisenbrey said.

Unlike a lot of initiatives that focus on raising wages for the bottom of the workforce, the proposed rule “raises the wages of the largest number of people” and does so “across a large swath of the labor market” because it also focuses on those whose wages encounter downward pressure because they are allowed to nominally be called managers, Damon Silvers, director of policy and special council of the American Federation of Labor, said during the June 30 teleconference.

Melissa Sharp, a compensation expert for WorldatWork, said in a news release: “If this regulation were to be finalized, companies will be forced to move employees from exempt to nonexempt status, and the change in this status will likely limit employees' hours, wages, workplace flexibility and growth potential.”

Although there “may be especially harsh employers willing to reduce workers' wages,” requiring them to work overtime to get back to the same salary, that is unlikely to occur, Eisenbrey said, adding that there was a lack of evidence that such actions were taken after previous salary-threshold increases.

As the unemployment rate continues to fall and with a lower ratio of job seekers, workers have more bargaining power than years ago, so employers that took such unscrupulous steps would find an exodus of workers going to jobs where they would be paid more and paid fairly, said Anna Chu, vice president for the Center for American Progress Action Fund during the June 30 teleconference.

Looking Ahead

The next step is for the proposed rule to be published in the Federal Register early next week, followed by a comment period.

Christine Owens, director of the National Employment Law Project, said during the teleconference that employers and business groups would be able to express opinions on the proposed salary threshold, whether it was too high or too low, as well as respond to questions that the Labor Department has asked about the duties tests to determine whether and how the queries may be altered.

The department then is to consider the comments over a period of time and publish a final rule, which may adopt the threshold or adopt a different level, Owens said. Adopting a lower threshold seems particularly unlikely given that the proposed threshold still is less than the historic standard, she said.

The proposal likely would be adopted by year-end and take effect at the start of 2016, Owens said. There may be some challenges in Congress or in court, but the proposal should be implemented shortly after approval, she said.

A fact sheet and frequently asked questions are available at the Labor Department website.

To contact the reporters on this story: Christine Pulfery in Washington at cpulfrey@bna.com. and Michael Trimarchi in Washington at mtrimarchi@bna.com.


High Court Rules on ACA Subsidies, Same-Sex Marriage

The Supreme Court issued two critical rulings on June 25 and 26 that affect employers and payroll processing. In one, the high court upheld same-sex marriage across the country, which means that employers are to treat benefits provided to same-sex couples in the same manner that they are treated for opposite-sex couples. In the other, the court upheld employer penalties under the Affordable Care Act. See stories on Page 104 of this newsletter.