The revised overtime rule proposed by the Department of Labor under the Obama administration was recently struck down by the same U.S. District Judge who put its implementation on hold in November last year. The rule would have more than doubled – from $23,660 to $47,476 – the minimum annual salary that qualified for the Fair Labor Standards Act’s "white collar" exemptions.
The DOL had also proposed that the salary level be a moving target based on the 40th percentile of average annual executive, administrative and professional salaries. The impact of the revised rule was significant for employers; it would likely have meant increased salary levels by virtue of overtime pay eligibility for more than 4 million Americans.
The rule was slated for implementation nationwide on December 1, 2016. In preparation for that, many affected companies had proactively implemented internal changes to employee salaries and/or job classifications. But then, on November 22, 2016, U.S. District Judge Amos Mazzant suspended the implementation of the revised overtime rule. At the time, it was not known if the implementation reprieve would be temporary or lead to a final ruling striking down the new regulation. We got that answer on August 31, 2017 when Judge Mazzant issued an order permanently blocking the Obama DOL’s rule.
Mazzant’s ruling also found that automatic adjustments to the base salary threshold were unlawful. The decision was final on all issues before Judge Mazzant, according to Robert Boonin, former chairman of the Wage and Hour Defense Institute of the Litigation Counsel of America. Boonin reported it is unlikely the DOL under the Trump administration will appeal the order.
So, what does all this mean? It means the FLSA’s existing overtime regulations – last updated in 2004 – remain in effect, including the exempt annual salary threshold of $23,660. Boonin advises, however, that employers still need to think about how to classify and pay employees moving forward. In fact, it appears likely that future rulemaking will ultimately elevate the exempt salary threshold, although probably not as high as the Obama administration had sought.
Salary levels, however, are just one part of the overtime eligibility picture. It is the first part of the FLSA’s "Exemption Test" and has received the most attention in the rulemaking and legal processes that unfolded in the last few years. The second part of the Exemption Test requires passing the job duties test. An employee must meet requirements for both tests – salary and job duties – to be legally exempt from overtime pay.
The job duties test can be somewhat complex. It involves a series of statements for which you must be able to answer "yes" regarding the duties of the employee. There are several different exemption tests specific to executive, administrative, professional, learned professional, creative professional, outside sales, computer-related, and highly-compensated employees. It is essential for employers to be familiar with each possible exemption test and to be able to determine if the employee role being evaluated can pass the relevant series of questions. In our practice at Total Reward Solutions, we often find companies have trouble in two key areas.
The first trouble area for employers applying the FLSA exemption test is misclassification of part-time employees. To be considered for exemption, part-time employees must meet the weekly salary test just as full-time employees do. There is no annualizing of part-time employee pay in order to satisfy the salary test.
The second area employers find troublesome in the exemption test is in misunderstanding – and incorrectly applying – the administrative exemption. This portion of the FLSA is somewhat ambiguous and may not cover employees doing administrative work the way companies often believe it does.
So, while the revised overtime standards for the FLSA would have meant significant wage increases for millions of Americans, the status quo is maintained regarding exempt threshold salary levels – for now. But don’t forget that those exemption tests must be met as well. If your company took the initiative and implemented pay program and salary administration changes in anticipation of the implementation of the revised rules, it may be wise to stay the course. Reversing or revising employee-positive changes could lead to confusion and poor morale that could ultimately negate any cost-savings from reverting to the 2004 rules.
Cassandra Faurote is President of Total Reward Solutions.