Upcoming FLSA Changes: What You Need To Know

Given these observations, it is abundantly clear that the DOL's proposed revisions to the FLSA regulations will raise the minimum salary threshold for the white-collar exemptions. Commentators expect that the new minimum threshold will exceed $600, given that the $455 threshold from 2004 would amount to $561 in 2014 when adjusted for inflation. But given that the salary threshold has been revisited only once a decade (or even longer, such as the 30-year gap between 1975 and 2004), it seems probable that the DOL will propose a new minimum salary threshold that is significantly higher than $600, so as to keep the threshold at a reasonable level for the foreseeable future. It is even possible that the Department will propose some type of indexing of the new dollar figure, so as to ensure that the minimum salary threshold will increase at the rate of inflation in the future.

Regional Problems

One problem that is likely to confront the Department is the fact that the salary threshold is uniform across the country. The White House notes in its Fact Sheet that some states, such as New York and California, have already adopted minimum salary thresholds for exempt status under state overtime laws that are significantly higher than the federal threshold. Although the White House identifies this as a reason to increase the minimum salary threshold across the country, it also illustrates the fact that different regions may require different minimum salary thresholds. The cost of living in New York City is not the same as in Sioux Falls, IA; and the cost of labor is likewise very different in those two cities. If the DOL sets a minimum salary threshold that ensures that a worker will receive sufficient compensation to comfortably support a family of four in Los Angeles, that new minimum salary threshold may create an extraordinary burden for an employer in Peoria, IL. The DOL will need to be cautious in establishing a new minimum salary threshold that works for the entire country, and not merely for the coasts.

Simplifying the Regulations

President Obama's Directive to the Secretary of Labor also suggests strongly that the proposed revisions to the FLSA regulations will extend beyond raising the minimum salary threshold for the white-collar exemptions. President Obama has specifically directed the DOL to consider “how the regulations could be revised to update existing protections consistent with the intent of the act; address the changing nature of the workplace; and simplify the regulations to make them easier for both workers and businesses to understand and apply” (emphasis added). The last of those items, simplifying the regulations and making them easier to apply, does not appear to be related to the salary threshold. The President instead seems to be instructing the DOL to make substantive changes to the regulations.

Simplifying the FLSA regulations, of course, is a laudable goal. President Obama is not the first United States Chief Executive to seek to accomplish this goal. Ten years ago, the Bush administration issued new regulations that were also ostensibly designed to simplify the application of the FLSA. However, the 2004 changes to the FLSA regulations ultimately added additional complexities and requirements to the white-collar exemptions. Most commentators have concluded that the revisions resulted in a regulatory scheme that was more complex and harder to apply than the pre-2004 regulations. It is not at all clear how the DOL will be able to simplify the regulations in the year 2014 and make them easier to apply when prior efforts to do so have had the contrary result.

The Percentage Test

Nonetheless, if the DOL is looking to simplify the regulations, it is possible that it will do so by following the lead of several states, including California, which have adopted a percentage requirement for the white-collar exemptions. The current white-collar exemptions merely require that an employee's “primary” duty must be the performance of exempt tasks (e.g., administrative duties involving the exercise of discretion and independent judgment, executive duties involving the management of subordinates, etc.).

The current FLSA regulations do not specify how much time the employee must spend performing such tasks in order to qualify for a white-collar exemption. Although employers obviously have an easier time defending exempt status if the employee spends the majority of his or her time performing exempt duties, various employers have successfully defended the classification of employees as exempt on the grounds that their primary duty was exempt, even though they spent less than 50% of their work time performing that duty. The percentage test would modify that standard and require that an employee must spend more than half of his or her work time performing exempt duties in order to qualify for an exemption. California is one of several states to have adopted a percentage requirement for the white-collar exemptions. Many commentators believe that the DOL will propose revisions to the FLSA regulations to adopt a similar percentage requirement for the white-collar exemptions on a national basis.

Certainly the percentage requirement has an appealing appearance of simplicity. Proponents of the test argue that it is easier to measure how much time an individual spends on each of his or her tasks on a daily basis than to determine what duty is “primary.” But if the DOL follows that line of reasoning and suggests a percentage test, employers and their counsel will face significant changes to the FLSA landscape. Employers will need to prove that exempt professionals spend more than 50% of their time performing exempt duties. Many employers will wish to begin documenting employees' time so as to prove that the employees are spending more than half of their time performing exempt duties. Employers may also elect to perform “time and motion” studies for key positions to obtain as much objective documentation as possible supporting the exempt nature of the employees' work. Such studies can be an effective defense to FLSA litigation, but they can also be costly, time consuming, and administratively burdensome.

Of course, the percentage test would not modify or remove the issues that typically are presented in any piece of wage and hour litigation. Employees typically argue that they are not given sufficient discretion to qualify for the administrative exemption, or do not have the authority to make executive decision so as to qualify for the executive exemption. Employees will still be able to make those arguments if a percentage test is adopted. Moreover, the imposition of a percentage requirement may actually make those issues more complicated and difficult to resolve.

Any time and motion study defense must consider not only how an employee spends his or her time, but also whether each duty qualifies as exempt work. Only after the employer establishes that a particular function qualifies as exempt work ( e.g., involves the exercise of discretion and independent judgment) can the employer then show that the employee spends most than 50% of his or her time performing functions that qualify as exempt work.

Ultimately, a percentage test would impose significant administrative burdens on employers who wish to classify employees as exempt under one of the white collar exemptions. It seems probable that a number of employers will conclude that the costs and administrative burden of meeting these new requirements are too great to justify classifying employees as exempt, and that those employers would therefore reclassify the employees as nonexempt and pay them overtime. It is also likely that the change will result in a significant increase in wage and hour lawsuits, an area of litigation that is already expanding quickly.

Conclusion

Given the prospect of these changes, employers and their counsel should carefully watch the DOL and assess the proposed revisions when they are ultimately published. Employers should strongly consider offering their opinions regarding those regulations as part of the notice and comment process. In 2004, the regulations ultimately adopted by the DOL differed from the initial proposal, likely as a result of the strong opinions expressed in a number of employer comments regarding the regulations. The DOL may be similarly responsive to feedback in 2014. Finally, of course, employers should be prepared to adapt to any revised regulations when they are ultimately adopted.

Joseph G. Schmitt is a shareholder in the labor and employment group at Nilan Johnson Lewis PA in Minneapolis. Reach him at [email protected].

President Barack Obama recently issued a memorandum to the United States Secretary of Labor directing the Department of Labor (DOL) to propose revisions to modernize and streamline existing overtime regulations under the Fair Labor Standards Act (FLSA). Employers and employment law practitioners are now analyzing what changes are likely to be proposed, and evaluating how those changes might impact the workplace and employment litigation. The changes will likely have a significant impact on employers and their overtime obligations.

Salary Threshold

President Obama issued a “Fact Sheet” at the same time that he directed the DOL to propose revisions to the FLSA regulations. The Fact Sheet provides clues as to the ultimate direction the President wishes the DOL to take in revising those regulations. In particular, the Fact Sheet focuses on the minimum salary threshold that employers must pay to employees in order for them to qualify for one or more of the so-called “white-collar” FLSA exemptions (the administrative exemption, professional exemption, executive exemption, and related exemptions). The current minimum salary threshold for the white-collar exemptions, $455 per week, was last raised during the Bush administration, in 2004. (Prior to that point, the minimum salary threshold had not been modified since 1975, when it was set at $250 per week.) As noted in the White House Fact Sheet, the current $455 minimum weekly salary is below the 2014 poverty line for workers supporting a family of four. At a time when the Obama administration is pushing an increase in the minimum wage for “non-exempt” hourly employees, this minimum salary threshold for exempt professionals is obviously problematic.

Given these observations, it is abundantly clear that the DOL's proposed revisions to the FLSA regulations will raise the minimum salary threshold for the white-collar exemptions. Commentators expect that the new minimum threshold will exceed $600, given that the $455 threshold from 2004 would amount to $561 in 2014 when adjusted for inflation. But given that the salary threshold has been revisited only once a decade (or even longer, such as the 30-year gap between 1975 and 2004), it seems probable that the DOL will propose a new minimum salary threshold that is significantly higher than $600, so as to keep the threshold at a reasonable level for the foreseeable future. It is even possible that the Department will propose some type of indexing of the new dollar figure, so as to ensure that the minimum salary threshold will increase at the rate of inflation in the future.

Regional Problems

One problem that is likely to confront the Department is the fact that the salary threshold is uniform across the country. The White House notes in its Fact Sheet that some states, such as New York and California, have already adopted minimum salary thresholds for exempt status under state overtime laws that are significantly higher than the federal threshold. Although the White House identifies this as a reason to increase the minimum salary threshold across the country, it also illustrates the fact that different regions may require different minimum salary thresholds. The cost of living in New York City is not the same as in Sioux Falls, IA; and the cost of labor is likewise very different in those two cities. If the DOL sets a minimum salary threshold that ensures that a worker will receive sufficient compensation to comfortably support a family of four in Los Angeles, that new minimum salary threshold may create an extraordinary burden for an employer in Peoria, IL. The DOL will need to be cautious in establishing a new minimum salary threshold that works for the entire country, and not merely for the coasts.

Simplifying the Regulations

President Obama's Directive to the Secretary of Labor also suggests strongly that the proposed revisions to the FLSA regulations will extend beyond raising the minimum salary threshold for the white-collar exemptions. President Obama has specifically directed the DOL to consider “how the regulations could be revised to update existing protections consistent with the intent of the act; address the changing nature of the workplace; and simplify the regulations to make them easier for both workers and businesses to understand and apply” (emphasis added). The last of those items, simplifying the regulations and making them easier to apply, does not appear to be related to the salary threshold. The President instead seems to be instructing the DOL to make substantive changes to the regulations.

Simplifying the FLSA regulations, of course, is a laudable goal. President Obama is not the first United States Chief Executive to seek to accomplish this goal. Ten years ago, the Bush administration issued new regulations that were also ostensibly designed to simplify the application of the FLSA. However, the 2004 changes to the FLSA regulations ultimately added additional complexities and requirements to the white-collar exemptions. Most commentators have concluded that the revisions resulted in a regulatory scheme that was more complex and harder to apply than the pre-2004 regulations. It is not at all clear how the DOL will be able to simplify the regulations in the year 2014 and make them easier to apply when prior efforts to do so have had the contrary result.

The Percentage Test

Nonetheless, if the DOL is looking to simplify the regulations, it is possible that it will do so by following the lead of several states, including California, which have adopted a percentage requirement for the white-collar exemptions. The current white-collar exemptions merely require that an employee's “primary” duty must be the performance of exempt tasks (e.g., administrative duties involving the exercise of discretion and independent judgment, executive duties involving the management of subordinates, etc.).

The current FLSA regulations do not specify how much time the employee must spend performing such tasks in order to qualify for a white-collar exemption. Although employers obviously have an easier time defending exempt status if the employee spends the majority of his or her time performing exempt duties, various employers have successfully defended the classification of employees as exempt on the grounds that their primary duty was exempt, even though they spent less than 50% of their work time performing that duty. The percentage test would modify that standard and require that an employee must spend more than half of his or her work time performing exempt duties in order to qualify for an exemption. California is one of several states to have adopted a percentage requirement for the white-collar exemptions. Many commentators believe that the DOL will propose revisions to the FLSA regulations to adopt a similar percentage requirement for the white-collar exemptions on a national basis.

Certainly the percentage requirement has an appealing appearance of simplicity. Proponents of the test argue that it is easier to measure how much time an individual spends on each of his or her tasks on a daily basis than to determine what duty is “primary.” But if the DOL follows that line of reasoning and suggests a percentage test, employers and their counsel will face significant changes to the FLSA landscape. Employers will need to prove that exempt professionals spend more than 50% of their time performing exempt duties. Many employers will wish to begin documenting employees' time so as to prove that the employees are spending more than half of their time performing exempt duties. Employers may also elect to perform “time and motion” studies for key positions to obtain as much objective documentation as possible supporting the exempt nature of the employees' work. Such studies can be an effective defense to FLSA litigation, but they can also be costly, time consuming, and administratively burdensome.

Of course, the percentage test would not modify or remove the issues that typically are presented in any piece of wage and hour litigation. Employees typically argue that they are not given sufficient discretion to qualify for the administrative exemption, or do not have the authority to make executive decision so as to qualify for the executive exemption. Employees will still be able to make those arguments if a percentage test is adopted. Moreover, the imposition of a percentage requirement may actually make those issues more complicated and difficult to resolve.

Any time and motion study defense must consider not only how an employee spends his or her time, but also whether each duty qualifies as exempt work. Only after the employer establishes that a particular function qualifies as exempt work ( e.g., involves the exercise of discretion and independent judgment) can the employer then show that the employee spends most than 50% of his or her time performing functions that qualify as exempt work.

Ultimately, a percentage test would impose significant administrative burdens on employers who wish to classify employees as exempt under one of the white collar exemptions. It seems probable that a number of employers will conclude that the costs and administrative burden of meeting these new requirements are too great to justify classifying employees as exempt, and that those employers would therefore reclassify the employees as nonexempt and pay them overtime. It is also likely that the change will result in a significant increase in wage and hour lawsuits, an area of litigation that is already expanding quickly.

Conclusion

Given the prospect of these changes, employers and their counsel should carefully watch the DOL and assess the proposed revisions when they are ultimately published. Employers should strongly consider offering their opinions regarding those regulations as part of the notice and comment process. In 2004, the regulations ultimately adopted by the DOL differed from the initial proposal, likely as a result of the strong opinions expressed in a number of employer comments regarding the regulations. The DOL may be similarly responsive to feedback in 2014. Finally, of course, employers should be prepared to adapt to any revised regulations when they are ultimately adopted.

Joseph G. Schmitt is a shareholder in the labor and employment group at Nilan Johnson Lewis PA in Minneapolis. Reach him at [email protected].