by Brian Farrington, esq, Cowles & Thompson
President Obama has announced that as part of his effort to increase job protections for workers, he will ask the Department of Labor to propose revisions to the rules on who can be a salaried exempt employee, exempt from the payment of overtime. This follows an Executive Order the President issued in February 2014 directing the executive branch to increase the minimum wage to $10.10 per hour for employees on new federal contracts starting in January 2015.
A little bit of background
The federal wage hour law is the Fair Labor Standards Act, 29 USC 201, et seq. (“FLSA”). The Act requires that employees who work more than 40 hours per week get time and a half for their overtime hours. There are a number of exemptions from the overtime requirements, however, and the most important is the exemption for certain classifications of (typically) salaried employees—executive, administrative, and professional employees, and outside salespeople.
Unlike the minimum wage, which cannot be raised for employees other than federal contractors except by an Act of Congress, the FLSA delegates to the Secretary of Labor the duty to define by regulation who is an executive, administrative, or professional employee, or outside salesperson. This means that it doesn’t take an Act of Congress to change the exemption rules. It only takes a regulatory change by the US Department of Labor.
In order to be exempt under the terms of 29 CFR 541, employees generally have to be paid on a salary basis (there are some exceptions, such as outside salespeople, and doctors, lawyers, and teachers). Exempt employees also have to meet some duties tests, which are laid out in the Regulation.
The current minimum salary for exemption is $455 per week, or $23,660 per year. (The current poverty threshold for a family of 4 is $23,550 per year). This rate has been in effect since 2004, and is 156% of the current minimum wage for 40 hours.
Since salaried exempt employees often work more than 40 hours, it’s clear that the current salary level is fairly minimal. This is particularly so in light of the fact that the President would like to increase the minimum wage to $10.10 per hour, which for a 40 hour week would be $404.
How exempt employee rules may change
- The weekly salary test. The simplest and most obvious change in the current rules is an increase in the minimum salary exempt employees are required to be paid. At least one progressive think tank has proposed $984 per week, which seems unlikely. But a significant increase is certainly possible.
- The duties test. Another area rankling employee groups is the duties tests under the current regulation. Until the Bush administration changed the Regulation in 2004, employees had to have exempt work as their “primary duty,” and the term “primary duty” generally meant that duty in which employees spent over half their time. Under the Bush Administration, the definition of “primary” was changed from the most consuming to the most important. As a result, courts have routinely allowed the exemption for employees who spend 60, 70, even 80% of their time in routine duties; as long as they can make a plausible argument that the exempt work they do is the most important.
For example, store managers who spend 75% of their time in stocking, waiting on customers, etc., have still been found to be exempt managers. This is an area where a return to the previous standard would be anticipated. That is, it’s likely that the Department of Labor will propose changing the regulations to require that employees spend over half their time in exempt work in order to be exempt from overtime pay.
- Learned professionals’ definition. Also possible is a change involving the definition of learned professional employees. Under the current regulation, a college degree is not required in meeting the learned professional exemption. Instead, an employee must merely show that the work requires that level of knowledge, and that he/she has achieved the ability to do that kind of work through a combination of education and experience. Employee groups would like to see the regulation changed to require formal academic credentials as a prerequisite for exemption as a learned professional.
The wheels of change will be slow to turn
Any changes to 29 CFR 541 won’t happen overnight. First, the Department of Labor must draft the changes and issue a notice of proposed rulemaking in the Federal Register. A public comment period would follow. Once the comment period is closed, the Department would have to review and take into consideration the public’s comments, and then issue a final rule.
In a nutshell, even if the President is able to make the changes he wants, there’s a long road ahead to implement them. Further, the oversight committees in Congress, particularly the relevant sub-committees of the Committee on Education and the Workforce in the Republican-controlled House of Representatives, are certain to be vehemently opposed.
About Brian Farrington
Brian Farrington is an experienced employment law attorney who previously served as Assistant District Director with the US Department Labor, Wage and Hour Division and is a contributing editor to EY’s Payroll Perspectives and EY’s Principles of Payroll Administration published by Thomson Reuters. He is currently with the Dallas-based firm COWLES & THOMPSON, where he assists employers with employment law issues. Brian can be reached at firstname.lastname@example.org