Major Changes in Who Must Get Overtime Imminent, Ex DOL Wage & Hour Chief Says

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By Martin Berman-Gorvine
With assistance from Mike Dorning

June 29 --Major changes in the Labor Department rules governing which employees are exempt from overtime are coming, with a DOL notice of proposed rulemaking “likely” this week, former agency official Tammy McCutchen told human resources practitioners June 29 in Las Vegas.

Meanwhile a current administration official told Bloomberg the same day that the agency will announce as soon as June 30 a draft regulation to increase the minimum salary for exempting workers from federal overtime requirements to $970 a week in 2016, the equivalent of a $50,440 annual salary. The official asked for anonymity because the plan hasn't been officially announced.

Speaking at a Society for Human Resource Management's annual conference in Las Vegas, McCutchen said a preview of the new regulations is anticipated June 30 in an interview President Barack Obama reportedly granted to the online news source Huffington Post.

The interview may include “hints” about the proposed regulations, she said. McCutchen, who was administrator of DOL's wage and hour division under former President George W. Bush, is currently a principal at Littler's Workplace Policy Institute in Washington.

“DOL has not cooperated with us, so this is based on what I have heard around Washington,” said McCutchen. Current Washington wisdom is that the NPRM will “certainly” come before Congress adjourns for its August recess, she said, adding: “If I was really cynical, I would say they'll wait till right before the August recess so that Congress won't be able to hold hearings on it” before it adjourns.

The notice will be followed by a public comment period, and then a final rule with an effective date. McCutchen projected a timeline for this process based on what the Wage and Hour Division did in 2003-04 under her direction, but modified by current political considerations. Thus, if the NPRM comes out this week, the comment period would likely run through September, with the final rule to be anticipated by May 2016 “to come in before the 2016 election cycle,” and an effective date in the summer or early fall, possibly by September 2016.

McCutchen said if she were the administration, she would ensure that the new regulation takes effect before the November 2016 presidential election; otherwise, if a Republican is elected president and the rule hasn't taken effect, the new administration could abolish it.

Obama set the process of overhauling the overtime regulations in motion March 13, 2014, when he instructed DOL to reexamine it. McCutchen oversaw rewriting of the overtime regulations in 2004, the last time they were revised and the first time they had been updated in 55 years before that, she said. As amended then, the line between exempt and nonexempt employees involves three tests: salary level, salary basis, and job duties.

Battling Over Raise

Labor Department Secretary Thomas Perez met with business groups and trade associations last summer, discussions that McCutchen participated in and that touched on the appropriate salary floor for exempt workers and what changes could be made to ensure that assistant managers who spend most of their time performing nonexempt work cannot qualify for the executive exemptions, she said.

On the first issue, it has been over a decade since the last time the salary dividing line was increased, so everyone admits it's time for another raise. Until 1975, this number was usually updated every five to 10 years, McCutchen said. Employee advocates have been pushing for numbers much higher than the current level of $23,660.

McCutchen cited a June 17 article by the Economic Policy Institute calling for a minimum salary level of $1,000 per week or $52,000 per year, which would make 44 percent of salaried employees nonexempt and eligible for overtime. That would be unprecedented, she said, noting that two large Democratic-leaning states currently set their own floor for overtime exemption much lower--California at $600 a week and New York at $800. Rep. Mark Takano (D-Calif.) and 30 congressional colleagues had called for an even higher federal FLSA floor, of $69,000 a year.

If any of these high levels are set, “SHRM will need all of you to mobilize and make sure it doesn't happen,” McCutchen said.

Following Employees With Stopwatch?

Another major expected change to the overtime regulations involves the “primary duty test,” McCutchen said. Currently, an employee's primary duties for overtime status are determined based on all facts, with major emphasis on “the character of the job as a whole,” she said. Time spent on duties that fall under the exempt heading is a “useful guide” but not determinative, she added.

Reportedly, the new regulations will follow California's regulation, which requires “over 50 percent” of an exempt employee's time to be devoted to exempt tasks--the fourth time in 77 years that the duties test under FLSA will have changed. This will create big measurement problems, McCutchen said, asking rhetorically whether someone would have to “follow employees around with a stopwatch.”

“If this goes through, if this is in the final regulations, it will be hard to classify any assistant manager as an exempt manager,” McCutchen warned.

Feeling the Most Pain

Other changes McCutchen said are expected in the duties test are:

• Under the current rule, concurrent performance of exempt and nonexempt work does not disqualify an employee from exemption. McCutchen expects that qualifier to go away.

• Currently, an exempt employee must supervise two full-time employees, but full-time is not defined. McCutchen said she expects that full-time may be defined as 40 hours a week, requiring executives to supervise a total of 80 hours of FLSA-compensable working hours a week. In effect, she said, that will mean employers “shouldn't define anybody as exempt unless they supervise three full-time employees.”

• McCutchen shied away from predicting what will happen to the administrative exemption, noting that she tried and failed to change it on her watch.

• “DOL will be looking for opportunities to narrow the computer exemption,” she said. This is a special case because Congress inserted the duties test for computer jobs in the FLSA statute itself in 1996, so “DOL's discretion is limited and subject to challenge,” she said, Nevertheless, she said she expects the new regulations to classify as nonexempt all help desk employees, database administrators, information security and applications design specialists.

• Outside sales exemption: McCutchen expects the new rule to conform to the California regulation, which provides that an employee must make sales away from the employer's place of business more than 50 percent of the time. The current federal rule provides less specifically that the exemption applies to salespeople who are “customarily and regularly engaged” outside company premises.

 

Industries that will “feel the most pain” from these changes, McCutchen predicted, are the restaurant and hospitality industries, because of the assistant manager rule changes; financial services, because of the narrowing of the duties test affecting their salespeople; and “everybody who has exempt employees who are working below the salary threshold.”

Some Workers Won't Like Being Nonexempt

But some employees who are reclassified as nonexempt won't like it, McCutchen warned. For example, she noted, exempt employees can't have their pay docked for staying home with a sick child.

“There are tradeoffs we're trying to explain to staffers on the Hill and at DOL, and they don't believe us,” she said. “Believe it or not, not all employees want to be nonexempt. They don't want to have to punch a time clock, or they want to be able to work 30 hours one week and 55 the next.”

On the plus side, this will be a “golden opportunity” for HR to pressure senior management to reclassify employees who are misclassified as exempt even under the current regulations, with the “muscle” of the impending federal change to back up HR's stand, she said. And when the changes are made, HR “can say it's due to a change in the federal regulations, not that we misclassified you [employees].”

“Don't wait for the final rule,” McCutchen advised employers, adding that as soon as the NPRM comes out they should start reviewing the exempt status of employees and planning reclassifications.

With assistance from Mike Dorning in Washington

To contact the reporter on this story: Martin Berman-Gorvine in Las Vegas at mbermangorvine@bna.com

To contact the editor responsible for this story: Simon Nadel at snadel@bna.com