Overtime Regulation Changes

Changes to the federal regulations addressing employee compensation are coming and coming soon.  Even though the changes to wage and hour regulations are not finalized, it is time to start thinking about how they might affect your business.

A quick review – to qualify for exempt treatment under the Fair Labor Standards Act (FLSA), that is, in order to properly be salaried, an employee generally must 1) be paid a predetermined and fixed wage that is not subject to reductions because of variations in the quality or quantity of work performed (the “salary basis test”); 2) be paid at least a specific salary threshold (the “salary level test”); and, 3) primarily perform executive, administrative, or professional duties (the “duties test”).1 Hourly employees covered by the FLSA must be paid for overtime hours at the rate of time and one half for all hours worked (as compared to paid) in excess of 40 unless they are exempt.

In March of 2014, President Obama, arguing that the “white collar” exemptions for executive, administrative, and professional employees have not kept up with the times, instructed the Department of Labor (DOL) to “modernize and streamline” overtime regulations and to “simplify” the regulations to make them easier to understand and apply.

Last July, the DOL published the proposed regulations. The proposed regulations were expected to, but did not, address the “duties test”. The current federal “white collar” regulations, which have been in place since 2004, look at relative compensation not the percentage of time spent performing various duties. Many anticipated the DOL would revert to a “percentage of time standard”, requiring an employee to spend no more than “x” percent of their work hours in nonexempt activities in order to qualify for a “white collar” exemption.

Instead, the proposed regulations addressed the “salary level test” by doubling the minimum threshold for overtime protection from its current $23,660 annually to $50,440 annually ($970 per week). This proposal will make an estimated 5 million more workers in the country, over 80,000 in Wisconsin, eligible for overtime payments. The proposed regulations also call for annual automatic updates (commonly known as cost of living adjustments or COLA) to prevent the level from becoming outdated.

The DOL received over 200,000 comments regarding the proposed regulations during the 60 day public comment period and refused requests for an extension of the time period, stating that the 60 day comment period “provides sufficient time for interested parties to submit substantial comment.”

In November, the DOL indicated a final rule will be issued in July of 2016 and, more recently, DOL Secretary Perez indicated the rule will be finalized this spring. In any event, changed regulations are highly likely to be finalized before President Obama leaves office.

1Note there are also exemptions for computer workers, outside sales people, professionals (i.e., doctors, lawyers, and teachers), and highly compensated employees (HCE) who receive total annual compensation of more than $100,000 per year.