Labor and Employment Law

Major Changes Coming to Management and Overtime

Group of businessman carrying briefcase run around a clock 3d illustration


On March 14, 2016, the U.S. Department of Labor (DOL) submitted its final overtime rule to the Office of Management and Budget (OMB) for review. Review by the OMB is the final step before publication of the final rule and generally takes between four and six weeks. This means that employers may well see the rules come into effect before mid-May. Indeed, many believe that this is likely the DOL’s strategy, as publication of the Final Rule after May 16, 2016?would put it subject to the Congressional Review Act under the next presidential administration, giving Congress and the next administration the opportunity to nullify the rule.

Changes in Overtime Laws

Currently, the Fair Labor Standards Act (FLSA) requires all employees in the United States to be paid at least the federal minimum wage for all hours worked. In addition, these employees must receive overtime pay equal time one-half their regular rate of pay for all hours worked over 40 hours in a workweek. However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive employees, among others.

In order to qualify for the executive employee exemption, all of the following tests must be met:

1) The employee must be compensated on a salary basis of at least $455 per week, which translates to $23,660 annually;

2) The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

3) The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and

4) The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.

Put more generally, in order to qualify as an exempt employee under the FLSA, an employee must be paid the minimum salary and must work in what most would refer to as a managerial position.

Under the new proposals currently being considered by the OMB, the DOL would increase the $455 per week ($23,660 annual) salary minimum by approximately 47% to $970 per week, which translates to $50,440 annually. It goes without explaining that this nearly-doubled salary requirement could cause employers headaches and financial difficulties.

However, the new proposals do not stop at mere financial increases. The new DOL also proposes to change the language of requirement (2), above. The new proposal appears to adopt a standard that many claim reflects California’s overtime law, which requires an exempt manager to spend at least 50% of his or her time performing their primary managerial duties. While the current standard governs the employee’s “primary duty,” this can be debated. Arguably, an employee can physically engage in routine, lower-level tasks throughout the workday while still managing an enterprise, whether verbally or otherwise. The new proposal, however, provides an objective criterion directly aimed at how an employee spends his or her actual time. Multitasking with lower-level assignments could result in a court holding that this 50% threshold has not been met and thus that the employee is not exempt under the FLSA and must receive overtime pay.

What It All Means

All in all, employers should be vigilant of these proposals and plan ahead in case changes need to be made in the near future. Failing to restructure labor could create causes of action for many employees whose salaries do not meet the $50,440 threshold. Labor may need to be restructured in a way that disperses the work to a point that it can be completed within a 40-hour work week by hourly employees. Alternatively, employers may need to restructure labor with respect to managerial roles. A combination of paying hourly wages to those who engage primarily in lower-level work and providing raises to those who spend at least 50% of their time performing managerial duties may be necessary.

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