Obama Proposes Shrinking White-Collar Exemptions
March 31, 2014
President Obama has proposed expanding the availability of overtime pay, directing the Labor Department to do its first overhaul of Fair Labor Standards Act (FLSA) regulations in 10 years.
The president signed a memorandum on March 13, 2014, instructing the Labor Department to update regulations about who qualifies for overtime pay. In particular, he wants Labor to raise the threshold level for the salary-basis test from the current $455 per week in order to account for inflation. The threshold has been raised just twice in the past 40 years. He would not specify the exact amount the threshold should be raised.
“Unfortunately, today, millions of Americans aren’t getting the extra pay they deserve. That’s because an exception that was originally meant for high-paid, white-collar employees now covers workers earning as little as $23,660 a year,” Obama said in remarks on overtime pay.
The memorandum also suggests that both the primary duties and pay of some exempted employees do not truly fit in the executive, administrative and professional employees exemptions, referred to as the white-collar exemptions.
The executive exemption is ripe for narrowing, according to Mark Neuberger, an attorney at Foley & Lardner in Miami, who noted that a lot of store managers who currently fit within the exemption “work a lot of hours but do not make a lot of money in the big scheme of things.”
In a fact sheet on the president’s memorandum, the White House said: “Millions of salaried workers have been left without the protections of overtime or sometimes even the minimum wage. For example, a convenience store manager or a fast food shift supervisor or an office worker may be expected to work 50 or 60 hours a week or more, making barely enough to keep a family out of poverty, and not receive a dime of overtime pay.” The FLSA’s minimum wage would not protect a salaried worker because salaried workers’ pay must satisfy the weekly salary-basis test rather than the hourly minimum wage, which is $7.25 per hour.
It also pointed out that “only 12 percent of salaried workers fall below the threshold that would guarantee them overtime and minimum wage protections (compared with 18 percent in 2004 and 65 percent in 1975).” Further, the fact sheet called the FLSA regulations outdated, noting that states such as New York and California have set higher salary thresholds.
In California the threshold is not less than twice the minimum wage for a full-time employee, which is why it’s $640 this year and will rise to $800 in 2016, Scott Witlin, an attorney at Barnes & Thornburg in Los Angeles, told SHRM Online.
The Golden State also requires a quantitative test of exempt and nonexempt duties, so if a worker spends 20 hours doing nonexempt activities, the employee can’t be exempt, he added. The FLSA doesn’t have a quantitative test, but some are speculating it might work its way into the Labor Department’s proposed rule.
Small businesses will be hit particularly hard by a change in the FLSA regulations, Witlin predicted.
If the regulations shrank the white-collar exemptions, employers would have two main options to hold down costs, according to Keith Gutstein, an attorney at Kaufman, Dolowich & Voluck in Woodbury, N.Y. They would have to either increase workers’ salary above the new salary-basis threshold, to avoid paying overtime, or leave employees in the nonexempt category and pay them overtime. Companies could also hire more employees, but the other two options were likelier, Gutstein said, even though this one “sounds good to get people off unemployment and back to work.”
Implications for HR
Once tightened white-collar exemptions are implemented, which isn’t likely for months now, it could result in far-reaching implications for HR, including wage and hour audits and layoffs, explained Allan Bloom, an attorney at Proskauer in New York City. “It’s a zero-sum game—the money has got to come from somewhere.” That might mean layoffs, reducing overtime and taking a fresh look at the fluctuating workweek, he said.
When asked at a press briefing about the burden on businesses if the Obama administration succeeds in its efforts to both increase the federal minimum wage and revise FLSA regulations, Betsey Stevenson, a member of the White House’s Council of Economic Advisers, said, “We think these two items are very different, but, obviously, they do feed into the same thing, which is people should be rewarded for fair work.” She suggested that some workers in the white-collar exemptions aren’t even earning minimum wage for all the work they do at low salaries.
“The president believes that unless you’re truly in one of these white-collar jobs, that employers should be paying attention to whether they’re actually meeting the duties of paying you the minimum wage and that they should be required to pay you for the hours you work,” she said. “It’s a pretty simple idea: Employers should pay people for the hours they work.”
Even though the president did not assign a number for the minimum salary-basis threshold, Stevenson said the overtime “protections have been eroded over time. This threshold … in 1975 was nearly $1,000 in today’s dollars; today it’s $455.” Stevenson believes that the rule should be modernized as a matter of the “basic principle of fairness.”
Business groups were less convinced of the need and more wary of the effects of revising the exemption. In a news release, the National Retail Federation’s senior vice president of government relations, David French, said: “The last time these rules were looked at, an update was desperately needed because of the uncertainty around overtime rules and the bonanza it was creating for trial lawyers. There is no evidence that it is desperately needed now. Employers who carefully considered the proper classification of their workforce 10 years ago would have to go through that process all over again and would again be faced with uncertainty, administrative burdens and costs that are contrary to the goal of job creation.”
He added: “At the very minimum, any new regulations on overtime need to go through the full, formal rulemaking process and be thoroughly debated with input from all sides.”
Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.