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Review of Overtime Exemptions May Bring Further Costs

While considerable public debate continues over whether the current federal minimum wage should be increased, a separate wage and hour discussion is also taking place that may have a far greater impact.

On March 13, 2014, President Obama directed the Department of Labor to come up with a way to update overtime pay rules to reflect the “changing nature of the American workplace” and to make them more” in keeping with the intention of the Fair Labor Standards Act.” The review is intended to focus on the current “White Collar” exemptions which exclude positions that are “executive,” “administrative,” “professional,” “outside sales” and certain “computer” professions from the requirement of paying overtime pay for work over 40 hours per week. Currently, to meet these exemptions, the person must be paid on a salary basis in an amount of at least $455 per week. Among other requirements, the positions must involve managerial or supervisory responsibility involving the exercise of independent judgment or require advanced knowledge and education as the exemptions are currently defined.

The President believes that the exemptions are too broad and that overtime should apply to many more employment positions. He also believes that salary amounts are too low. This position is not new. The Department of Labor proposed substantial revisions to these exemptions in 2003 which also attempted to narrow the positions that would qualify for exempt status. After receiving more than 75,000 comments during the rule making comment period, the Department backed off of the more aggressive approach, to more moderate changes that were more in line with the exemptions that went into effect in 2004. Advocates for greater change vowed then to revisit the issue. President Obama’s directive to the Department of Labor signals that the time has come for revisiting the matter.

Looking back to 2003, employers can anticipate that one major area of focus will be on increasing the salary thresholds for meeting the exemption since those exemptions have not been adjusted since 2004. The $455 threshold would be about $553 per week in today’s dollars. Depending upon the amount of increase, current salaries may need to be raised if an employer’s intent is to keep the exemption.

A second anticipated area of focus will be on the definitions of the exemptions themselves. Employers should anticipate an increased requirement for the percentage of time clearly doing exempt work. In addition, employers should expect tougher definitions that eliminate consideration of work performing “independent judgment” with greater consideration to the “degree of responsibility” involving a “high level of competence.” These, in fact, were included in the proposed changes in 2003.

Although these are just areas of study now, we can anticipate it becoming a significant issue of debate due to the President’s efforts to enact more legislation through Executive Order or the rule making process. So far, the Department of Labor has responded to the President’s request by indicating the Department would follow the rule making process. While this may take some time, and possibly litigation to sort out, there are a few things an employer may want to consider in the interim:

  • Evaluate exempt status positions and determine what, if any, exposure exists if the wage thresholds were increased. Salaries often far exceed the thresholds and there would be no impact. At the same time, if there are some salaries close to the threshold, an evaluation could be done on whether an increase is cost effective in meeting the exemption, or whether the position should change to an hourly position subject to overtime pay.
  • Evaluate the number of hours worked per week for exempt positions. If positions work 40 hours per week or less, there may be little or no impact. At the same time, if the position works considerably more than 40 hours per week, there may be a need to consider alternatives depending on the salary already provided and how solid the duties are in meeting the definition of the exemption.
  • Evaluate the actual duties performed including how much of the current work is exempt and how much is not. Review job descriptions and be ready to implement changes to demonstrate the actual duties to be performed including the degree of responsibility and level of competence required.

As of now, there is no current change in the law, but merely a request to study these issues and report back to the President. However, knowing the President has clearly signaled his desire to increase wages in almost all areas, it is an issue worth staying up on, while beyond issues surrounding the minimum wage.

This article was published on April 7, 2014 in The Business News.