APRIL 9, 2019

In a span of four weeks, the U.S. Department of Labor (the “DOL”) has issued two regulatory proposals that may affect the wages of millions of American workers.  If implemented, the changes will expand the number of employees eligible for overtime compensation and adjust the calculation of overtime pay.

Proposed Expansion of Overtime Eligibility

The Fair Labor Standards Act (“FLSA”) generally requires employers to pay employees both a minimum hourly wage and overtime compensation.  The FLSA carves out exemptions for certain categories of workers however, and the most common overtime pay exemption categories are the “white collar” or “EAP” exemptions. 29 U.S.C. § 213(a)(1).  While the broad scope of these exemptions was created by Congress, the DOL is empowered to establish by regulation the specific criteria necessary to satisfy the exemptions. 

To qualify for the white collar exemptions, current federal regulations require an employee to perform specific job duties that vary based on the exemption sought and to earn a minimum salary of at least $455 per week.  In 2016, the Obama administration proposed new rules that would raise the minimum weekly salary to $913 and the amount would automatically increase every three years.  However, a federal court blocked these rules from going into effect on the basis that the rules exceeded the Department of Labor’s authority under the FLSA.

Since then, it has been widely anticipated that the DOL will issue a new set of regulations that will include a more modest increase to the minimum salary required to qualify for white collar exemptions. During the first week of March, that is exactly what happened.  The Trump administration has proposed setting the minimum salary at $679 per week, which annualizes to $35,308.  Notably, up to 10 percent of that minimum salary may be satisfied by non-discretionary bonuses and incentive payments.  The DOL estimates more than one million workers are paid less than this salary threshold and therefore will become eligible for overtime compensation under the proposed rules.   

The proposal also adjusts the requirements to meet the separate “highly compensated employee” exemption.  Federal regulations currently exempt from overtime requirements an employee who annually earns at least $100,000, who is guaranteed compensation of at least $455 per week, whose primary duty is office-based work, and who customarily performs at least one of the duties required for the white collar exemptions.  The new regulatory proposal raises the annual required earnings threshold for this exemption from $100,000 to $147,414 and the weekly guaranteed compensation to at least $679 per week.

The proposed rule is now subject to a comment period during which employers and other stakeholders can submit their questions and concerns to the DOL.  Once the comment period ends on May 21, 2019, the agency will develop a final rule that will not necessarily mirror the proposed version.  The DOL anticipates the final rule will go into effect in 2020.   

Action for Employers

Even though any changes to overtime exemptions are likely a year away, employers should begin preparing now.  Employers may begin by reviewing employees’ historic compensation and work hours to identify currently exempt employees who earn below the proposed $679 weekly salary.  Employers should weigh whether it will be preferable to raise the salaries of potentially impacted employees or to begin paying them overtime when required.  Since the white-collar exemptions require both a minimum required salary and satisfaction of specific job duties tests, this also is a good time to audit the job duties of exempt employees to ensure positions currently deemed exempt properly qualify for this treatment.  Because the final rule may differ from the proposed version, employers only need to begin their analysis.  No changes need to be made until the final rule is put in place.  

Proposed Adjustments to Calculation of Overtime

An additional proposal takes aim at the method for calculating the overtime pay.  For more than 50 years, the FLSA has required that covered employees be paid at 1.5 times their “regular rate” of pay for any time worked over 40 hours in a single workweek.  The regular rate for each workweek is calculated by taking most payments made to an employee for that workweek and dividing the total compensation by the number of hours worked that week.  The types of payments that must be included in the regular rate are found in the FLSA as well as DOL regulations.  Examples of excluded payments are amounts paid as vacation or sick pay, certain expense reimbursements, gifts and discretionary bonuses.  This method of calculation based on the “regular rate of pay” may cause an employee’s overtime payrate to vary significantly.

On March 28, the DOL issued a proposal that clarifies and expands the list of payments that may be excluded from the regular rate.  The DOL explained that it believes employers are discouraged from offering certain perks to employees because doing so effectively increases the employees’ overtime rate. 

Among other things, the proposal includes:

  • Examples of bonuses that may properly be excluded from regular rate calculations such as “spot” bonuses that are not based on any preestablished criteria, bonuses for overcoming challenging situations, and employee of the month bonuses;
  • Excluding “show-up pay” and “call-back pay” for employees on call;
  • Clarification that a payout for unused PTO need not be included in the regular rate of pay calculations;
  • Examples of the types of reimbursed expenses that may properly be excluded from regular rate calculations; and
  • Excluding the cost of certain benefits such as:
    • wellness programs;
    • onsite specialist treatment;
    • gym access and fitness classes;
    • employee discounts on retail goods and services; and
    • tuition benefits.

Action for Employers

The DOL’s regular rate proposal is open for public comments until May 28, and a final rule will be issued thereafter.  The final rule will likely differ from the proposal.  Accordingly, employers should review their compensation practices to ensure the regular rate of bring is being properly calculated under current law and evaluate how the proposed changes may impact overtime obligations going forward.  When (and if) the DOL issues its final rule, employers will need to implement the revised regular rate of pay calculations.  If you have questions or need assistance regarding compliance with the Fair Labor Standards Act requirements and other employment laws, please contact a member of Hancock Daniel’s Labor & Employment team.

The information contained in this advisory is for general educational purposes only. It is presented with the understanding that neither the author nor Hancock Daniel, is offering any legal or other professional services. Since the law in many areas is complex and can change rapidly, this information may not apply to a given factual situation and can become outdated. Individuals desiring legal advice should consult legal counsel for up-to-date and fact-specific advice. Under no circumstances will the author or Hancock Daniel  be liable for any direct, indirect, or consequential damages resulting from the use of this material.

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