Obama to Direct FLSA Overtime Expansion To Promote Administration's Wage Agenda

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By Gayle Cinquegrani and Chris Opfer  

March 12 --President Barack Obama will instruct the Labor Department to make overtime pay available for “millions” of workers by narrowing the Fair Labor Standard Act's “white-collar” exemption, a White House official told Bloomberg BNA March 12.

The move, details of which are expected to be announced March 13, is considered by some as a political maneuver intended to show that the president is bypassing Congressional gridlock to move forward with vital job and economic growth initiatives. It's likely to be considered controversial and would have a substantial impact on employers, according to lawyers and other sources who spoke with Bloomberg BNA March 12.

The initiative is expected to focus on tightening the qualifications for workers to be classified as bona fide executive, administrative, professional and outside sales employees. These so-called white-collar employees are currently exempt from the FLSA's general requirement that workers be paid time and a half for all hours worked in excess of 40 each week.

The initiative appears to be “part of the larger agenda to increase workers' wages,” former Deputy Labor Secretary Seth Harris told Bloomberg BNA March 12. “This is another piece of a larger agenda--raising the minimum wage, improving job training programs, and creating jobs through significant improvements in infrastructure.”

Harris, who has been teaching at Cornell University's School of Industrial and Labor Relations since leaving the Labor Department in January, speculated that the President will not dictate the details of the proposal but will expect the Labor Department to craft its proposed rule by early summer, a very short time for such undertakings. “The President understands that the clock is ticking on his second term and that if he is going to make this important change in the regulations, the Labor Department will have to move very quickly,” Harris said.

“If your goal is to raise the minimum wage but you don't think you can do that politically, this is a way to raise wages for a group of employees,” said Kevin Hyde, the chair of Foley & Lardner's labor and employment practice. “Really, it's an effort to find a way to raise the wages of lower-wage workers,” Hyde told Bloomberg BNA March 12.

A Labor Department spokesman declined to comment March 12.

Executive, Administrative, Professional Employees

The Fair Labor Standards Act 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, Section 13(a)(1) of the FLSA provides an exemption from overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt some computer 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. In general, their duties must include managing a part of the enterprise and supervising other employees or exercising independent judgment on significant matters or require advanced knowledge. Job titles do not determine whether employees are exempt from the overtime requirement.

The exemption has not been revised since 2004, when the Bush administration raised the minimum qualifying salary level from $155 a week to $455 a week and changed some of the requisite job duties . The 2004 regulatory change generated tens of thousands of public comments .

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, according to the White House official.

The current salary level of $455 is “laughably low,” Harris said. “It's only a few dollars more per week than the proposed new minimum wage would require for all workers,” he said. “One of the most significant drags on the nation's economic recovery is that American families don't have enough money in their pockets to spend.”

“This is another piece of a larger agenda--raising the minimum wage, improving job training programs, and creating jobs through significant improvements in infrastructure,” former Deputy Labor Secretary Seth Harris said.  

Catherine Ruckelshaus, general counsel and program director at the National Employment Law Project, told Bloomberg BNA March 12 that employers, especially those in restaurants and stores, often label low-wage workers as managers and then fail to pay them overtime. Particularly in the aftermath of the recession, she said, “there hasn't been a lot of hiring, [and] employers are squeezing the employees who are still there.” She said she is “heartened” that the President is “exercising leadership” to show that the Fair Labor Standards Act is important.

'Pen and Phone Strategy.'

The initiative would make good on Obama's State of the Union pledge to go it alone when necessary to implement measures to stimulate the economy and create jobs . It also boosts the narrative being floated by Democrats in the run up to mid-term elections that they're focusing their efforts on helping workers, while their Republican counterparts' single-minded concentration on undermining Obamacare impedes progress on issues such as raising the federal minimum wage and extending emergency unemployment benefits for long-term jobless workers.

“We are in an environment in which legislative action is going to be scarce,” Jim Kessler, the senior vice president for policy at moderate think tank Third Way, told Bloomberg BNA March 12. “This is Obama's pen and phone strategy of doing what you can without getting congressional approval,” he added. “They're scouring federal regulations to see what can be done by administrative action.”

Kessler said the Obama administration is also looking for ways to connect with middle-class voters heading into mid-term elections. Republicans, he said, are likely to characterize the overtime changes as simply another example of an “imperial presidency” while trying to avoid appearing as if they don't want to get anything done in Congress.

“There is a focus right now in the Democratic party and in Democratic politics on workers,” a House Democratic aide told Bloomberg BNA March 12. “That is a direct response to the lack of such a focus in the other party.”

Adam Sarvana, the communications director for congressional progressive caucus leader Rep. Raul M. Grijalva (D-Ariz.), said the caucus wasn't aware that the order was coming, but that it's in line with the CPC's recent focus on wages. “Cracking down on wage theft and expanding access to overtime pay and sick leave have been a big part of the CPC's economic agenda over the last year and was something we talked to our friends in labor about as a natural focus for on-Hill and off-Hill efforts,” Sarvana told Bloomberg BNA March 12.

The overtime order may also help lawmakers continue to garner public support on the minimum wage front, according to Sarvana. “Depending on how it's implemented, this could help build a consensus around the importance of a living wage, which is already incredibly popular with the public,” Sarvana said. “As with a lot of policies, it helps to have a proof of concept in place to increase your support and show it can be done.”

Republican lawmakers have previously expressed concern about the president's similar unilateral moves, including a Feb. 12 executive order raising the minimum wage for federal contractor employees to $10.10 They've also taken issue with various proposed legislation that they say prevents employers from hiring more workers.

“There are all kinds of rumors about what the president may or may not do with regard to overtime pay and reclassifying some jobs for overtime, but if you don't have a job, you don't qualify for overtime, so what do you get out of it, you get nothing,” House Speaker John Boehner (R-Ohio) told reporters March 12. “The president's policies are making it difficult for employers to expand employment, and until the president's policies get out of the way employers are going to continue to sit on their hands.”

Employer Impact Potentially Substantial

It's unclear just what changes Obama will instruct the Labor Department to make to the white-collar exemption requirements. Allan Bloom, a partner at Proskauer Rose LLP in New York, told Bloomberg BNA that the president could seek to raise the exception's income threshold or require workers to devote a certain amount of their time on the job--50 percent, perhaps--to management-type duties.

Both moves are likely to have a substantial impact on employers by expanding the range of workers potentially entitled to overtime pay, according to Bloom. “It will fundamentally change the business model for lots of employers,” Bloom said. “They will have to pay this new big bucket of employees more money or offer them overtime.”

But Marc Bernstein, a partner in Paul Hastings LLP's New York office, said changes to the job duties a worker must perform in order to qualify for the exemption are likely to be more significant than raising the income threshold. At the current rate, a worker needs to make $23,660 a year to meet the exemption's income-level requirement. If that amount were raised to $31,200 (to $600 per week from $455 per week), Bernstein said it's still likely to encompass many workers performing managerial tasks, especially in major metropolitan areas where wages are generally higher than elsewhere.

Changes to the types of tasks that are considered managerial or the amount of time a worker must devote to those tasks in order to qualify for the exemption also are likely to be fertile grounds for litigation, according to Bernstein and Bloom. “When we went through this the last time in 2004 there was huge wave of litigation,” Bloom said.

Bernstein told Bloomberg BNA that it's difficult to quantify the impact of the changes without knowing exactly what the changes are going to be. He said the rulemaking process, during which interested parties can comment on proposed regulations, will be a good opportunity for employers to consider the changes and make their voices heard.

“There are all kinds of rumors about what the president may or may not do with regard to overtime pay and reclassifying some jobs for overtime, but if you don't have a job, you don't qualify for overtime, so what do you get out of it, you get nothing,” House Speaker John Boehner (R-Ohio) said.  


“No matter what the changes are, I would think that employers will want to have their voices heard, both at the Department of Labor and in Congress, with respect to any proposed alterations to the current FLSA requirements,” Bernstein said.

Bloom agreed. “People are going to be absolutely up in arms about this,” he said.

Meanwhile, Bloom said the rulemaking process will also give employers a good opportunity to review how they classify workers for FLSA purposes. “It's always a good idea to take a fresh look at your classifications in the first place if you have someone who's exempt,” he said. “Take a look at how much time they're spending on exempt activities.”

'Likely to Take Years.'

According to Ruckelshaus, a rulemaking to revise the white-collar overtime exemption is “completely within” the Labor Department's authority but “is likely to take years.” She explained, “There's lots of process and lots of opportunity for public comment on regulations like this.”

Tammy McCutchen, a shareholder at Littler Mendelson in Washington, D.C., told Bloomberg BNA March 12 that it took her approximately two years to spearhead the 2004 revisions to the white-collar overtime exemption when she was the administrator of DOL's Wage and Hour Division. She said WHD spent approximately a year drafting its original proposal and another year receiving public comments, revising the proposal, and waiting for clearance from the Office of Management and Budget.

McCutchen estimated it will take “a year to 18 months” to effect the change that Obama is expected to call for. This revision should not take as long as the 2004 revision because the provisions are not as outdated as they were then, she said. “Certainly they have time to do it before the end of the [Obama] administration,” McCutchen predicted.

The FLSA does not define executive, professional, and administrative employees, but instead gives the labor secretary broad discretion to define these terms, McCutchen said. She urged the DOL to consider that whatever salary level it adopts should be compatible with local economies throughout the nation, from lower-wage rural areas to higher-wage urban areas.

As for the president's insertion of himself into the rulemaking arena, McCutchen said, “I would characterize it as an ambush of the regulated community.” She pointed out that the Wage and Hour Division has focused primarily on the misclassification of independent contractors since Obama took office and never listed the white-collar overtime exemption on any of its semiannual regulatory agendas. “I don't think anybody expected this,” she said. “This is the least transparent process I've ever seen,” she said.


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

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

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