DOL Revisits Overtime Rule — Employers should expect some increase in salary floor

Employers across the nation may have thought they were done with changes to the overtime rule. Not so.

Way back last November, the U.S. District Court for the Eastern District of Texas issued a preliminary injunction barring the Obama Administration's nationwide implementation of new regulations that would have established a higher salary threshold for certain employees to be considered “exempt” from overtime requirements under the Fair Labor Standards Act (FLSA). Under the proposed regulations, the minimum salary level for executive, administrative, and professional employees to be treated as exempt from the general requirement that employees be paid time and a half for all hours worked over 40 in a week would have been $47,476 per year. The injunction represented a reprieve for employers across the country, as the new salary threshold would have impacted the compensation of approximately four million workers.

Ten months, a decidedly significant sea-change in Washington, D.C., and two nominees for Labor Secretary later, the U.S. Department of Labor (DOL) has issued a Request for Information, asking employers, workers, and interests groups for feedback on what the salary threshold should be. A few things to keep in mind:

  • On August 31st, the federal case down in Texas concluded with Judge Amos Mazzant issuing a final ruling that, while the DOL had the statutory authority to set a salary floor for exempt status, the specific salary floor set by the Obama overtime rule was invalid. The DOL promptly abandoned its prior appeal of Mazzant’s earlier preliminary injunction – and the Texas case is now over.
  • The DOL will be collecting responses to the RFI through late September.
  • At his confirmation hearings in March, Secretary of Labor Alexander Acosta signaled his belief that, while the Obama overtime rule represented an excessive increase, some increase is warranted because the salary threshold was last updated in 2004 and “life does become more expensive over time."
  • The RFI strongly suggests that the DOL is considering an inflation-based approach to raising the floor. According to the DOL’s CPI inflation calculator, an adjustment to the rule to account for inflation between 2004 and 2017 would result in a new threshold of somewhere between $30,000 and $33,000, depending on regional differences.

So, amidst all this uncertainty, employers are left in a lurch in terms of building and maintaining their compensation models. A few recommendations:

  • Employers are well-advised to determine to what extent they currently pay non-overtime eligible employees less than $33,000 a year.
  • Employers are also well-advised to start considering the impact of either increasing compensation for these employees to a new threshold (say, $33,000) or paying overtime to these employees for all hours over 40 worked in a week.
  • Many of the same considerations weighed by employers at the time of the Obama overtime rule’s introduction will still be relevant this time around; the only difference is that the Trump overtime rule will impact a smaller cohort of employees. A key consideration is the effect of a higher floor on the rest of the business’ compensation model. For example, if Peter, who was making $28,000 a year, receives a $5,000 raise to preserve his exempt status, what happens to Paul, who was making $33,000 a year for more skilled work? Additionally, should an employer decide instead to keep wages level and make a position overtime eligible, what will be the psychic effect on re-classified employees who may be angry that they now have to punch a time clock even though they have always been considered “white collar.”

Employers should realistically expect some increase in the salary floor for the FLSA’s executive, administrative and professional exemptions. Fortunately, given that both judicial and administrative processes will be ongoing until at least late 2017, employers have time to be thoughtful in their planning.

George can be reached at 216-928-2899 or gasimou@walterhav.com.