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Overhaul of Overtime Rules Is Coming: Shape Remains Unclear

A recent presidential order is likely to bring major changes in how employees are classified as qualifying for overtime pay, or as being exempt from it. The current rules, drafted when many employees were easily characterized as blue collar workers in manufacturing, will be updated to apply to the current, more service-oriented employment economy.

The reasons for the forthcoming changes in the overtime rules are found in their history. In the midst of the Great Depression, Congress enacted the Fair Labor Standards Act (“FLSA”), which required employers to pay a minimum wage and overtime pay to employees. The FLSA was intended to advance two goals: (1) pay an amount of compensation that would enable employees to support their families; and (2) provide an economic incentive for employers to hire more people and thereby reduce the ranks of the unemployed in order to avoid paying employees at the rate of time and half for hours worked in excess 40 in a week.

The FLSA, however, included exemptions from the overtime pay obligation for employees who worked in Executive, Administrative, Professional, and Outside Sales capacities. The U.S. Department of Labor (“DOL”) promulgated regulations that interpreted that statute and provided guidance to employers as to how employees should be classified for the purpose of invoking such White Collar exemptions. In order to qualify for exemption, Executive, Administrative, and Professional employees had to be paid on a salary basis and primarily perform certain types of tasks.

DOL periodically updated the FLSA regulations, but those modifications involved relatively minor tweaks that failed to eliminate the ambiguity inherent in applying a regulatory scheme created when most employees worked in manufacturing rather than the technical and service enterprises that predominate today. As a consequence, critics have characterized the FLSA as being obsolete and in need of significant changes to reflect what is happening in the workplace of the 21st Century.

President Obama recently acknowledged that criticism by issuing an executive order that directs DOL to undertake a review of the FLSA and recommend modifications needed to “modernize” that law. The executive order, however, does not specify how the law should be changed or set a deadline for DOL to complete that process.

A few predictions can be safely made regarding what DOL is likely to recommend. For example, current regulations enable employers to exempt White Collar Employees if they are paid a weekly salary of $455, which equates to approximately $24,000 per year. That amount does not correlate with an employee who purportedly occupies a place relatively high in the corporate hierarchy as compared with ordinary employees. In addition, employers operating in many markets obviously cannot hire individuals to perform White Collar functions at such a low salary. As a consequence, that minimum salary requirement is out of touch with reality and may be abused by employers trying to avoid paying overtime compensation by classifying relatively low-level employees as being “salaried.”

In addition, the definition of the duties required to qualify a worker as a White Collar Employee is often very difficult to apply to jobs being performed by many employees. For that reason, different courts have reached results that cannot be reconciled in cases involving employees working in identical jobs in different parts of the country. Overtime pay lawsuits filed in different parts of the country by managers and assistant managers of the same fast food restaurant chain graphically illustrate that situation. In one case, the court ruled that they were not qualified for exemption as Executive employees, but another court reached the opposite conclusion.

Such inconsistencies in interpreting the FLSA obviously create a dilemma and administrative headaches for employers who operate in multiple jurisdictions. The DOL is likely to address that problem by simplifying the definition of White Collar Employees by: (1) creating job titles that are presumptively exempt from the obligation to pay overtime; or (2) making it more relevant to the types of jobs found at businesses today.

The task assigned to DOL is daunting because and the regulatory scheme under the FLSA is complex and some business groups will aggressively lobby for a status quo and changes that serve only them. The process that unfolds over the next several months or even years is necessary, but will undoubtedly bring to mind the adage about sausage – you won’t want to eat it after seeing how it’s made.

For more information please contact Mike Smith at 410-583-2400 or smith@bowie-jensen.com

 

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