PROPOSED REGULATION ON OVERTIME PAY EXEMPTIONS
On March 13, 2014, President Obama signed a Presidential Memorandum directing the Department of Labor (the “DOL”) to update the regulations defining which white collar workers are protected by the Fair Labor Standards Act’s (the “FLSA’s”) overtime standards. On July 6, 2015 the DOL published the proposed rule defining and delimiting the overtime exemptions for executive, administrative and professional employees.
The FLSA guarantees overtime pay when an employee works over 40 hours in a workweek. However, certain executive, administrative and professional employees are exempt from these overtime pay protections. To be considered exempt, employees must: (1) be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties (the “duties test”).
Under the current regulations, an executive, administrative, or professional, employee must be paid at least $455 per week ($23,660 per year for a full-year worker) in order to come within the standard exemption. The DOL’s proposed changes focus on what the DOL has recognized as the best single test of exempt status, the salary test.
In order to maintain the effectiveness of the salary test, the DOL proposes to set the standard salary level equal to the 40th percentile of earnings for full-time salaried workers (the DOL projects that the 40th percentile weekly wage in the final rule would likely be $970, or $50,440 for a full-year worker). Furthermore, in order to prevent the levels from becoming outdated, the DOL is proposing to include in the regulations a mechanism to automatically update the salary and compensation thresholds on an annual basis.
While salaried workers such as teachers, academic administrative personnel, physicians, lawyers, judges and outside sales workers are not currently subject to the salary test, educational institutions may still anticipate an impact in entry and mid-level professional positions such as student life, development, administration and academic affairs. Educational institutions with these types of employees that earn the current weekly salary level of $455 but less than the 40th percentile of earnings would become entitled to overtime protection under the FLSA.
Educational institutions have options in regards to how they decide to implement and administer the proposed rule change. An educational institution, may of course, keep their current employment practices and pay the overtime wage. An educational institution may also decide to implement a cap on hours or a reduction of hours for employees during the workweek, and then hire additional part time employees to cover the extra work. If an employee’s salary is close to the 40th percentile of earnings threshold, an employer may raise the employee’s base pay to the threshold to avoid having to pay overtime. Finally, educational institutions may lower hourly base pay to offset any overtime hours that may be incurred, as long as the hourly base pay remains above minimum wage.
The proposed rule is subject to public comments until September 4, 2015. After review of the comments, the DOL may issue a final rule change as soon as 2016.