FLSA Overtime Proposed Rule Change

If you have employees and over $500,000 in gross revenue, you are likely subject to the Fair Labor Standards Act, and it’s rules on overtime pay. Some of those rules may be changing this summer, based on the DOL’s release, and it has some far-reaching implications for many businesses and their employees.

I’m sure you’ve heard the term ‘exempt’ or ‘non-exempt’ employee. If you stop for a second, you might wonder, what is the employee ‘exempt’ from? And the answer is exempt employees are exempt from ‘overtime pay’. Work hard to get ahead. Show up early. Go home late. All things that ‘exempt’ employees can do, can be encouraged to do, as the employer pays them a fixed salary, and does not have to track hours, or pay those employees more if they work 60 hour weeks.

The DOL has concerns that over the fact that since 1970 the salary level has only been changed once, and currently the salary floor for an exempt employee is $23,660. The administration’s rationale behind raising it, is that historically, most Americans during the 20th century, qualified for overtime. They state that in 1975, 62% of “Salaried” workers, were eligible for overtime. (Hourly workers will always be eligible for overtime). However since the threshold hasn’t changed in any meaningful way in the past 30 years, more and more people are being asked to work more hours in jobs that pay very little.

The change will increase the salary floor for exempt employees to $50,400, a sizable jump. In addition, the salary will be updated annually for inflation.

Just to revisit current and proposed standards, lets look at the requirements:

Fact Sheet #17D: Exemption for Professional Employees …

If you’ve never read that before, it’s pretty comprehensive in how it defines a person eligible for the exemption. It spells out that for most occupations, they have to be paid on a ‘salaried’ basis, they need to earn over $23,660 (with a few exceptions), and their primary duties must be work involving advanced knowledge. In most cases, those exempt duties need to account for more than half of an exempt employees time. The duties test is pretty stringent, and it would be wise to consult legal counsel on specific employees status. As a side note — Doctors and Lawyers are exempt regardless of salary level.

Moving forward, with the salary level reset at $50,400, the DOL sees this rule change providing greater simplicity for employers as it will take ‘interpreting’ the duties test out of the equation for lower paid employees. No longer do you have to worry if the $40,000 a year employee is exempt or non-exempt — they will be ‘non-exempt’ and subject to overtime pay. This has the potential to create a need to track hours worked for employees who earn less than $50k but previously worked in exempt duties.

When you start to really think about it, for many employees around that ‘pay’ threshold, the new salary limit will create some unique HR issues.

For example, if an employer has two employees, both perform primary duties requiring advanced knowledge and prior to the new rule were considered ‘exempt’. Employee 1 earned 55,000 and had worked there for 5 years, employee 2 earns 45,000 and been there 2 years. Employee 1 would be exempt, but Employee 2, would not be. Employee 1 might come to work early, stay late, etc., where employee 2, could do so too, but the employer would need to track hours and pay overtime for hours over 40 a week. An employer would likely want to curtail the use of overtime by employee 2. However, a higher level position comes open that both employees are eligible for, Employee 1, will be seen as coming in early, working late, where employee 2, just works 9–5. It definitely makes it challenging for professionals at the same organization who do the same job, but straddle the salary line. Before this change, employees in the same positions could be treated as exempt or non-exempt uniformity because the salary level was a fairly low hurdle.

Additionally, employers might have employees working in different locations, and due to cost of living differences between cities/work locations, employees who live/work in lower cost areas might be non-exempt, while the same level employee in high cost area might be exempt.

Finally, this also creates concerns about tracking hours of telecommuters, as non-exempt workers will need some sort of timekeeping mechanism to record actual hours of work.

The other thing changing is that the salary level will now be adjusted for inflation so that we don’t end up where we are today with a salary level that hasn’t been updated for years. That means every year an employer will need to address the status of any employee on the bubble.

Personally, I struggle to reconcile both sides of the argument. The status-quo is more employer friendly, and if employers were truly following a strict definition of exempt duties, then the current method probably shouldn’t result in too much abuse of the exempt status. However, I can also see that employers probably don’t fully vet the duties test, and that for employees with lower salaries, this rule change takes the duties test out of the equation from employers. If you earn less than $50k, you are eligible for overtime (and you have to have hours tracked. Like raising the minimum wage, this rule change is meant to help raise income levels, especially of those employees working more than 40 hours a week. The DOL makes the statement that under the current rules, a person could be working 70 hours a week managing a retail store, and if they were earning $24,000, they would be below the poverty line for a family of 4.

There are two other groups who might be getting excited reading this — Medical Residents/Doctors, and Attorney’s. Unfortunately, I’ve got some bad news. Doctors and Lawyers are exempt by definition, regardless of your income level. If you are a new attorney, making less than $50k, burning the midnight oil, unfortunately, no, you aren’t getting paid overtime.

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