Federal Overtime Rules: Employers Fasten Seat Belts

Calling income inequality the “defining challenge of our time,” President Obama has been a powerful advocate of expanding government aid to lower and middle-income households.

He has urged support for housing, education, food stamps, unemployment insurance and, his signature achievement, the Affordable Care Act, which commits $1 trillion over ten years to expand Medicaid and provide subsidies to help pay health insurance premiums.

A key part of the strategy has been to boost incomes of the working poor—those who work full-time but don’t earn enough to make ends meet.

Minimum Wage Increase—

One of the President’s new initiatives has been legislation to increase the federal minimum wage—from $7.25 an hour to $10.10. Someone working full-time at today’s minimum wage earns only about $14,500 a year. A $10.10 per hour minimum wage would represent a 40% increase, to $20,200,

Congressional Republicans so far have been cool to the idea, citing a Congressional Budget Office report that hiking the federal minimum wage to $10.10 could cause employers to eliminate up to 500,000 jobs. CBO concludes that while a much higher minimum wage would make some workers winners others would come out losers because their employers couldn’t afford to pay them $10.10 an hour.

Fair Labor Standards Act Overtime Regulations—

As the minimum wage stalemate plays out on Capitol Hill the White House has reached for a second lever to directly boost worker pay—federal regulations governing exemptions from the time-and-a-half overtime rules of the Fair Labor Standards Act (FLSA).

U.S. Department of Labor rules stipulate that unless employees can be classified as FLSA “exempt,” they must be paid overtime for hours worked in excess of 40 per week. For example, FLSA exempt executives must earn more than $455 per week (about $23,000) and among other things have as their primary duty responsibility for managing, i.e., directing the work of other employees and having the authority to hire and fire.

Administrative exempt employees must earn more than $455 per week and perform office work directly relating to management or general business operations and exercise independent judgment with respect to matters of significance. Learned professionals can be FLSA exempt if they earn more than $455 a week and perform work requiring advanced knowledge.

Employers understand the FLSA’s distinctions between exempt and non-exempt categories and are careful to classify employees accordingly. Wage-hour law remains one of the highest employer compliance priorities.

It is precisely this area of FLSA overtime pay exemptions that President Obama has decided needs major change—specifically to extend FLSA overtime rules to more workers and thus directly increase their earnings.

In a March memorandum to the Secretary of Labor the President asserted that the “regulations regarding exemptions from the (FLSA) overtime requirement, particularly for executive, administrative and professional employees, have not kept up with our modern economy. Because these regulations are outdated, millions of Americans lack the protections of overtime and even the right to the minimum wage.”

The President then directed the Labor Secretary to “propose revisions to modernize and streamline the existing overtime regulations,” specifically to “update existing protections” and “address the changing nature of the workplace.”

It’s unclear how long this regulatory process will take, what changes the Department of Labor will propose or how all this might affect employers. We can guess that at a minimum Labor will seek to raise the $455 weekly threshold, set ten years ago, perhaps in the range of $600-$700 weekly, or $31,200-$36,400 annually. And since the President’s stated goal is to extend FLSA protections to millions more Americans, employers should assume the Labor Department may want to tighten the tests for executive, administrative and professional exemptions.

No timetable has been given but proposed rules could be announced before the end of this year. With public comments and Congressional hearings any final changes could be delayed well into 2015.

But there is no uncertainty about one aspect of changing federal overtime rules: they could have huge consequences for employer costs, compliance and scheduling. As noted above, FLSA wage-hour compliance is one of the highest employer compliance priorities. To implement major changes to federal overtime rules at the same time as Affordable Care Act mandates employers will need to have their seat belts firmly fastened.