March Madness brings competition, surprises, upsets, and the most climactic of all – overtime.
Just a week before President Obama made his famous March Madness picks, he issued a memorandum to the Secretary of Labor that could be sending many into overtime. These people are everyday employees.
On March 13, 2014, the President issued a memorandum to update and modernize overtime regulations provided under the Fair Labor Standards Act (the “FLSA”). The President stated that regulations that exempt executive, administrative, and professional employees from overtime pay “have not kept up with our modern economy.” Due their antiquity, the President found that millions of Americans lack proper overtime protections. Accordingly, the memorandum directed the Department of Labor to propose revisions to the current overtime regulations in order to “update existing protections” and “address the changing nature of the workplace.”
The FLSA is a federal law enacted by Congress in 1938, and its provisions are administered by the United States Department of Labor (the “DOL”). It protects workers by setting standards for minimum wage and overtime, and its broad coverage applies to virtually all employers. Employers must pay overtime – calculated as 1.5 times the regular rate – to all non-exempt employees for each hour worked in excess of forty hours during the work week. However, they do not have to provide overtime pay to exempt employees. Besides conducting tens of thousands of enforcement actions per year, the DOL conducts random audits of employers to identify employees who are improperly classified as exempt. There are three tests, all of which must be met, to classify an employee as exempt: the salary basis test, the salary level test, and the job duties test. The President’s directive to the DOL is likely focused on the salary level test and the job duties test.
The salary level test currently requires that the employee make at least $455 per week. The job duties test is a fact-specific inquiry into whether the employee fits one of the exemptions. Three of the exemptions – executive, administrative, and professional – were specifically addressed in the President’s memorandum to the DOL. The executive exemption requires that the employee’s primary duty be management of the enterprise or a department or subdivision. Such employee must direct the work of other employees, and have some genuine input into their job status. The administrative exemption requires that the employee primarily perform office and non-manual work related to the management or general business operations. Such employee’s primary duty must include the exercise of discretion and independent judgment with respect to significant matters. Finally, the professional exemption applies to employees whose primary duty is performing work requiring advanced knowledge, often with prolonged education or specialized instruction.
As a result of the President’s memorandum, the salary level test will likely increase from its current minimum of $455 per week for exempt employees. The number could remain below the current limit in New York – $600 – or it could exceed that number, guaranteeing a critical impact on New York employers. Under such changes, current lower-level managerial employees making just over $455 per week, or $23,660 per year, would no longer qualify for the executive exemption. (For New York, the limit of $600 per week equates to $31,200 per year.) Thus, their employers would be forced to pay them overtime for any hours worked over 40 in a given week. On the other end, employees may find their hours cut if employers cannot afford to pay the overtime.
The proposed revisions may also alter how to qualify as an executive, administrative or professional employee. This could include reclassifying the exempt duties, and/or requiring that such employees spend a minimum percentage of their time performing those exempt duties. Currently, during an audit or an enforcement action, the types of duties that an employee performs involves a very fact-specific inquiry, including analyzing the amount of time the employee spends performing each of her duties. For instance, if an alleged “administrative” employee only spends 20% of her time performing exempt duties, then she may be entitled to back pay for the overtime hours she worked. A minimum percentage requirement would make the inquiry even more specific, forcing employers to prove that the amount of time an employee spends performing particular duties meets the threshold. While a minimum percentage requirement may provide some clarity moving forward, it will put an immediate burden on employers to identify all of the duties of their employees and quantify how much time is spent on each task.
To prepare for regulations affecting the job duties of exempt employees, employers may be forced to perform expensive audits, analyzing each employee’s tasks in detail. The back-ended benefit may be that new regulations would provide a natural and non-suspect time to conduct audits and change the status of employees without raising any red flags. A change in the middle of an employee’s tenure may cause the employee to wonder why she was never paid overtime in the past, triggering an action. However, after the issuance of new regulations, an employer would likely reclassify an employee simply due to the newly provided exempt duties or percentage requirements.
Ultimately, the ensuing proposed revisions by the DOL may be suspect to challenge if they redefine the duties qualifying for the executive, administrative, and professional exemptions. Only time will tell if such a change will be effected. But, if the forthcoming regulations require exempt employees to spend a minimum percentage of time performing exempt duties, that would still trigger numerous internal audits to ensure compliance. Regardless, the new regulations will likely, at minimum, increase the salary requirements. While such a change may not impact employers that already pay higher wages to exempt employees, it will impact numerous industries such as retail, grocery and fast-food that pay “executive” employees a salary just above the current requirement.
With March Madness coming to a close, the best matchups put the viewers on the edge of their seats, hoping for an upset, and expecting the unexpected. With potential changes to the FLSA on the horizon, employers need keep their ears to the ground so that they do not unexpectedly find their employees heading to overtime.
Tyler Ellis is an Associate at Boylan Code LLP, concentrating his practice on general corporate matters. For more information, please contact Tyler at (585) 232-5300 or firstname.lastname@example.org.