Obama orders update of overtime regulations

Throughout his presidency, President Barack Obama has focused his attention on strengthening employee rights. In his most recent State of the Union address, Obama affirmed his intent to make sure the economy honors the dignity of work and that hard work pays off for Americans.

On March 13, he continued his efforts to strengthen employee rights by issuing a presidential memorandum to U.S. Secretary of Labor Thomas E. Perez to update the Fair Labor Standards Act’s overtime regulations. The revised regulations will undoubtedly impact employers’ pay practices and will likely result in more employees being eligible for overtime.

The FLSA

The FLSA establishes overtime requirements for employees in the private sector working for a covered employer. Generally, the law requires that employees receive overtime pay for hours worked over forty in a workweek at a rate of at least time and one-half their regular rate of pay.

However, the FLSA provides that certain employees are exempt from the overtime requirement. The FLSA regulations define which employees meet these exemptions by establishing a minimum salary threshold and requiring that their job duties meet certain tests for each exemption.

The presidential memorandum

In his memorandum, Obama stated that the overtime exemptions, including the so-called “white collar” exemptions — covering employees who are employed in an executive, administrative or professional capacity — are outdated. As a result, millions of Americans do not receive overtime. The memorandum directed Perez “to propose revisions to modernize and streamline the existing overtime regulations.”

Obama specifically instructed Perez to revise the regulations with the following purposes in mind: (1) “consider how the regulations could be revised to update existing protections consistent with the intent of the Act;” (2) “address the changing nature of the workplace;” and (3) “simplify the regulations to make them easier for both workers and businesses to understand and apply.”

Although the Labor Department has discretion as to how it will revise the regulations, the White House released a fact sheet specifically highlighting two areas that would strengthen overtime protections. The Labor Department most likely will focus on these key issues in the revisions.

First, it is almost certain that the minimum salary threshold will be adjusted to account for inflation. The current FLSA regulations require that employees be paid a salary basis of at least $455 per week (equivalent to $23,660 per year) to qualify as an exempt executive, administrative or professional employee. This salary threshold has been updated only twice in the last 40 years, with the most recent increase in 2004.

This salary threshold is exceedingly low by today’s standard, resulting in the majority of employees who are paid on a salary meeting this requirement. According to the White House fact sheet, only 12 percent of salaried workers fall below the current salary threshold. It is unclear by how much the salary threshold will be increased, but the goal is to have fewer employees qualify for the exemption, and thus qualify for overtime pay.

Second, the executive exemption duties test may be revised. The White House fact sheet provided examples of a convenience store “manager” and a fast food shift “supervisor” who may work 50 or 60 hours per week, did not receive overtime pay, and barely made enough money to keep their families out of poverty. The current FLSA regulations allow an employee to be classified as an exempt executive if the employee’s primary duty is management even if he or she spends the majority of their time performing nonexempt duties. Accordingly, the regulations may be revised to require that an employee spend a specific percentage of time performing managerial duties in order to qualify for the executive exemption.

What does this mean for employers?

Although it is uncertain how long it will take for the revised regulations to become effective, it is expected to take a year or longer. Issuing this presidential memorandum is the first step in the process of updating the regulations that must go through the standard notice and comment periods before being finalized.

First, the Labor Department will draft proposed regulations that Perez has estimated will take a few months. Then, the public (including employers and any other interested parties) will be given an opportunity to submit comments concerning the proposed regulations. Finally, the department will review the comments submitted and publish the final regulations with an effective date most likely a few months after publication.

Because it is unknown how the regulations will be revised, the impact on employers remains to be seen. Nevertheless, it is essential that employers continue to monitor and stay informed of these developments. The revised regulations will undoubtedly impact employers’ pay practices and will likely result in more employees being eligible for overtime.

In light of the significant increase in wage and hour lawsuits in recent years, it is more important than ever for employers to review their classifications. Accordingly, employers are well-advised to focus their efforts on ensuring their pay practices comply with the FLSA both now and after the regulations are finalized.

Jessica Pecoraro is a partner at Maslon Edelman Borman & Brand and head of the firm’s labor and employment group. Mari Kaluza is an associate at Maslon.