Continued Controversy About Overtime Rules: No, not the NFL; the FLSA

[Blogmeister's Note: To re-state an obvious but important point that our blogger, Kevin, has previously made, neither he nor we are "employment" lawyers. But readers and others have expressed enough interest in the coming changes to the federal minimum wage and overtime rules that he thought it a good idea to take a look at what's in store. The following overview is intended to provide useful background information; it should not be taken as a comprehensive explanation or exhaustive history of the subject, and certainly not "legal advice". If you have questions about the coming changes, be sure to contact an employment lawyer.]

Almost three years ago, I wrote about some proposed changes to the "overtime rules" under the Fair Labor Standards Act (FLSA) which, if enacted, would move approximately 4.1 million workers from "exempt" to "nonexempt" status, entitling them to overtime pay for work performed in excess of 40 hours per week. The proposed changes, which were approved and given an effective date of December 1, 2016, were eventually stayed by the United States District Court for the Eastern District of Texas before being repealed entirely in the early days of the current Administration.

Employers, especially those in many sectors of the media industry, breathed a sigh of relief, as the planning for the transition of a significant portion of their workforce from exempt to non-exempt would have required a massive investment of time and expense - even before you factored in the likely salary increases required to maintain the exempt status of some workers and the extra overtime that would have been paid to others.

This relief is short-lived, as the Department of Labor published a 219 page Notice of Proposed Rulemaking (NPRM) once again proposing to increase the minimum salary threshold for an exempt employee, albeit in a slightly less drastic way.

Because I have written extensively about this issue in the past, it is not necessary to explain in full how the overtime rules work again. Instead, I'll just provide a short overview (taken verbatim from one of my earlier posts), give a little additional history on the earlier proceedings, and explain these proposed changes and how they compare to the 2016 proposal. You can refer back to my earlier posts for more details.

The Basics of Overtime Pay Under the FLSA

The FLSA applies to any company that (a) has more than $500,000 in annual revenues and (b) is engaged in interstate commerce. In reality, a very significant number of companies in the United States are covered by the FLSA because (a) something called the "individual coverage" test can apply to any employee engaged in interstate commerce in a given week and (b) the definition of "engaged in interstate commerce" is very broad.

So, for our purposes, let's assume that, if you're reading this, your company is subject to the FLSA. That means the employees at your company (and I'll be writing from the point of view of an employer rather than an employee because most of our clients fall into the former category) are eligible for overtime pay at not less than 1.5 times the employee's pay rate for every hour worked in excess of 40 hours in a week, unless they are considered "exempt."

For an employee to be considered "exempt" from the FLSA's overtime rules - and therefore not eligible to overtime pay - he or she must meet all of the following three tests:

• The Duties Test: he or she is primarily performing executive, administrative, or professional duties as provided in the DOL's regulations (this is actually the most complicated portion of the exempt vs. non-exempt classification);
• The Salary Basis Test: he or she must be paid a predetermined and fixed salary not subject to reduction because of variations in the quality or quantity of work performed; and
• The Salary Level Test: he or she must be paid more than a specified salary threshold.

Both the 2016 and the current (2019) proposal only purport to change certain aspects of the Salary Level Test, which has had the same minimum threshold since 2004.

The main changes approved in 2016 were:

• An increase in the minimum threshold salary from $455 per week/$23,660 per year to $913 per week/$47,476 per year (after an initial proposal to increase to $970 per week/$50,440 per year - which was the equivalent of the 40^th percentile of weekly earnings of full time salaried workers in lowest wage Census region);
• An increase in the minimum threshold salary for a special category of employee known as the "highly compensated employee" from $100,000 per year to $134,000 per year (which was the equivalent of the 90^th percentile of all salaries);
• Certain changes to policies regarding the treatment of nondiscretionary bonuses, incentive payments, and commissions; and
• Automatic readjustments every three years of the minimum salary thresholds identified above to match the equivalent of the 40th percentile of weekly earnings of full-time salaried workers in lowest wage Census region for all workers and the 90th percentile of all salaries for highly compensated employees.

Again, these were supposed to go into effect on December 1, 2016 but Judge Amos Mazzant of the United States District Court for the Eastern District of Texas granted a motion for preliminary injunction filed by the State of Nevada on behalf of itself and twenty other states (that case was consolidated with a separate lawsuit filed by the Plano (TX) Chamber of Commerce and over fifty other business organizations). That lawsuit was effectively mooted after Obama left office and the new Administration repealed the rule change.

The Department of Labor has proposed its own set of changes which are remarkably similar to those proposed by its predecessor:

• An increase in the minimum threshold salary from $455 per week/$23,660 per year to $679 per week/$35,308 per year (after an initial proposal to increase to $970 per week/$50,440 per year;
• An increase in the minimum threshold salary for a special category of employee known as the "highly compensated employee" from $100,000 per year to $147,414 per year;
• The same proposed changes to policies regarding the treatment of nondiscretionary bonuses, incentive payments and commissions; and
• The minimum threshold salaries for all employees and highly compensated employees will be revisited every 4 (not 3) years - but these adjustments will not be automatic; instead, a notice and comment process will be utilized.

(Note that these new minimum threshold salaries will not apply in Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands; the salary level of $455 per week/$23,660 per year will continue to apply in those jurisdictions.)

Because this is a rulemaking proceeding, the Department of Labor will accept comments on this proposal for 60 days after publication in the Federal Register. Publication in the Federal Register has not occurred but we will let you know when that happens.

In terms of timing, however, most prognosticators believe these changes will be enacted as proposed and that they will become effective in January 2020. Though the minimum salary thresholds will be lower than the 2016 proposal, the impact will still be widespread: it is estimated that this will result in the conversion of approximately 1.3 million employees from exempt to non-exempt (approximately 200,000 of which are highly compensated employees).

So even if you are not planning to file comments, it may behoove you to start planning for this transition now. If you're not inclined to read all 219 pages of the NPRM, the Department of Labor has created a resource page surrounding these changes which includes a Fact Sheet and a series of Frequently Asked Questions.

And, my first two posts offered some ideas as to the issues you'll need to consider, the most important of which at this point is to simply start the preparation process in some way shape or form, whether that simply involves creating a list of employees who may move from exempt to non-exempt to see if you need to make changes or something more - like consulting with an employment attorney to strategically plan for the future.