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Obama Administration Updates Overtime Rules

The Department of Labor (DOL) is updating the rules that govern overtime for salaried workers under the Fair Labor Standards Act (FLSA). The new rules will make millions more Americans eligible for overtime wages.

The DOL is amending the "white collar" exemptions that exclude certain "executive, administrative, and professional" employees from overtime protections. A worker's status as an exempt executive, administrator, or professional is based primarily on salary level and duties.

The DOL's new rules will more than double the salary threshold for mandatory overtime coverage. Inflation had eroded the threshold to where a worker could be denied overtime pay if he made as little as $455 per week, or $23,660 per year, less than the poverty level for a family of four. The DOL proposes raising the salary threshold for "white collar" workers to $970 per week, or more than $50,400 per year, close to the median household income in the United States. This change creates a bright-line test in favor of overtime eligibility for millions of low-wage and middle class workers.

Effect of the New Rules

Under the current rules, employers often take advantage of "exempt" salaried employees, requiring them to work long hours performing routine work to reduce labor costs. For example, an assistant restaurant manager who makes $40,000 a year may work 60 hours a week and spend the majority of her time preparing food, working the cash register, and serving customers. A branch manager at a bank may work long hours performing teller and personal banking duties; and a retail store manager may spend the majority of her time assisting customers or setting up displays to replace hourly workers' time.

These employees likely do not meet the "duties" test, but because the salary level has been so low, they fell into a grey area where employers could misclassify them to avoid paying overtime. Under the new regulations, "managers" and other professionals who earn a salary lower than $50,400 per year will be guaranteed overtime regardless of their duties. Those who earn over $50,400 will still be entitled to overtime if their primary duties are non-exempt.

The new rules will soon put more money into the pockets of hardworking Americans because employers will either raise salaries to meet the new salary threshold or reclassify workers and start paying them overtime.

The new rules will also protect more salaried workers from having to work long hours without fair compensation. According to the DOL, raising the salary threshold serves two important policy goals: reducing overwork and its detrimental effect on workers' health and well-being; and spreading employment by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours.

Raising the salary threshold will also benefit employers. The new standard will be easier for employers to apply. According to the DOL, the revisions will "simplify the identification of nonexempt employees" and make the exemptions "easier for employers and workers to understand." This clarity will help reduce disputes and litigation costs in the long term.

The DOL says that raising pay for affected workers will reduce employee turnover and increase employee productivity, a boon for employers. According to President Obama, the change will also benefit "business owners who are already paying their employees what they deserve - since those who are doing right by their employees are undercut by competitors who aren't."

Changes to the Salary Threshold

Raising the salary threshold to $50,400 will affect 11 million workers, of whom 5 million may be newly eligible for overtime based on the salary increase alone.

The salary threshold was updated by the DOL on a regular basis (every 2 to 9 years), from 1940 through 1975. After 1975 the threshold was only updated once, in 2004.

As a result of this stagnation, according to the DOL, the regulations were "no longer effective at distinguishing between exempt and nonexempt employees." This eroded overtime protections for middle class workers. When the salary threshold was set at $250 in 1975, 65 percent of salaried workers were eligible for overtime. At the current salary threshold of $455, just 12 percent of salaried workers are guaranteed overtime. The DOL's amendment will expand coverage to a larger percentage of the salaried workforce.

To prevent the regulations from becoming outdated again in the future, the new rules will tie the salary threshold to a cost of living index. The DOL explained that "regular updates to the salary level test are imperative to ensuring that the salary level does not become obsolete over time." Indexing will provide predictability for employers and employees alike.

Beyond raising the minimum threshold for the white collar exemptions to over $50,400, the DOL proposes raising the threshold for the "highly compensated" employee exemption to $122,148 per year (from $100,000 per year). The DOL is also considering whether to allow employers to include non-discretionary bonuses and incentive payments in the salary threshold.

Changes to the Duties Standards

The DOL is also considering changes to the white collar duties test. Employee rights advocates say that the DOL should bring the FLSA in line with the more protective laws in California, where overtime is required for any salaried workers who spend more than 50 percent of their time performing the same duties as hourly workers. The DOL did not propose specific regulatory language to amend the duties test but is accepting comments from the public.

The DOL is also accepting comments regarding the duties test for computer technology employees.

New Rules Will Be Effective in 2016

The proposed rules will be released this week for a 60-day notice and comment period for stakeholders and advocates. The DOL will consider the comments and propose a final set of rules. The new rules are expected to go into effect in 2016.

If you have questions about your overtime rights under the DOL's new overtime rules, please visit http://newovertimepayrules.com or call us at (212) 245-1000.

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