The attorneys general (AGs) of 14 states and the District of Columbia have announced their opposition to a proposed Department of Labor (DOL) ruling that would increase the number of workers eligible for statutory overtime pay.

The newly proposed rule would also clarify the types of compensation that would be excluded from the definition of an employee’s “regular rate” on which the mandatory time-and-a-half overtime calculation would be based.

Regardless of the outcome, employers should pay close attention to developments stemming from the proposed rule change as both overtime payment requirements and record-keeping rules are poised for change on way or another.

The Fair Labor Standards Act (FLSA or Act) requires covered employers to pay employees a minimum wage. For employees who work more than 40 hours in a week, overtime premium pay consists of one-and-a-half times their regular rate of pay (ROP). The FLSA provides a number of exemptions to these two requirements, including the “white collar” or EAP (Executive, Administrative and Professional) exemption that spares executive, administrative, professional, outside sales and computer employees from the minimum wage and overtime requirements of the FLSA. The statute delegates to the Secretary of Labor, who has the authority to define and delimit the terms of this white-collar exemption.

Since 1940, the regulations implementing the exemption generally have three requirements:

1. The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test)
2. The amount of salary paid must meet a minimum specified amount (the salary level test)
3. The employee's job duties must primarily involve executive, administrative or professional duties as defined by the regulations (the duties test)

The DOL has consistently used the salary level test as a tool to help define the white-collar exemption on the basis that employees paid less than the salary level are unlikely to be bona fide executives, administrators or professionals, and, nearly all of them are paid at least that much.

The salary level test provides certainty for employers and employees; however, its usefulness diminishes as the wages of employees entitled to overtime increase and the real value of the salary threshold falls.

Why Is This Occurring Now?

The conflict between the DOL and state AGs has its roots in a rule adopted by the Labor Department in 2016, that an absent federal district court action staying the change would have raised the minimum salary level from $455 in weekly earnings to $913 and included an automatic updating procedure that would increase the salary level every three years. In November 2017, the DOL appealed the district court’s ruling to the Fifth Circuit Court of Appeals. Shortly thereafter, the appellate court granted a government motion to uphold the appeal while the DOL re-examined the salary threshold test. The result of that re-examination and the current proposed ruling was published in March 2019.

On May 21, 2019, a letter from the AGs of New York and Pennsylvania issued a statement opposing the proposed rule as inadequate to the needs of employees and urged the DOL to return to the terms of the now-enjoined 2016 ruling. They were joined in this statement by the AGs of California, Connecticut, Delaware, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, Rhode Island, Virginia, Washington and the District of Columbia.

Money is really the issue. Under the current law set in 2004, most employees with a salary below $455 per week ($23,660 annually) must be paid overtime if they work more than 40 hours a week. All sides seem to agree that the number should be raised but there is disagreement over how much. The DOL’s latest proposal would raise the minimum salary for overtime exemption to $679 per week ($35,308 per year). The state AGs are arguing for a level of $913 per week ($47,476 per year), as stated in the 2016 ruling.

What Isn’t Changing?

First, the DOL has confirmed its commitment to defining and enforcing the rules around federally mandated overtime. To avoid liability, employers need to clarify their understanding of exactly which employees can be classified as supervisory, administrative and professional — and thus rendered exempt from the paid overtime requirement — and which cannot.

Secondly, the ultimate final rule will not:

• Change the primary duty test
• Revise the duties tests required of executive, administrative or professional employees
• Amend the salary basis test

What Should an Employer Do Now?

To avoid future surprises and missed opportunities, the following steps should be considered:

• Complete an analysis of all job descriptions to be certain that they are current and accurately reflect all existing duties and responsibilities; then, modify these descriptions as needed and determine if positions are correctly classified and meet any exemptions
• Identify the positions that may be subject to the various proposed salary threshold increases listed above
• Review the results above and assess whether to convert each affected position to non-exempt, raise the salary level, and/or engage in some restructuring of the organization, if practical, to achieve the new salary requirement
• Comprehend exactly how the ROP, the basis for overtime, is calculated. There are benefits and perks employers can offer, sometimes in lieu of a raise, that do not increase ROP and employers should feel encouraged to make use of them
• Determine how operations would be impacted by reclassification to non-exempt status and/or salary increases to ensure compliance, including how those changes would then impact other employees (in addition to those directly impacted)
• Estimate lead time required to implement any changes to payroll and timekeeping systems
• Outline how to train new non-exempt employees on timekeeping matters
• Draft communications plans

What Effects Will Heightened Labor Costs Have on US Employers?

Employers are always attempting to determine potential options for controlling all costs, including labor. Overtime has been and will continue to be a focus. Trying to move the needle by concluding that properly classified jobs previously did not meet the exemption standards prior to the salary level change, will magically now meet the standards, will only cost more in the long run. It is not practical to cut jobs when customer demand is high and vendor loyalty is not like it once was. Failure to deliver high quality products on time and at a fair price will be the final decision-making point.

The focus of a properly structured compensation plan will ensure that appropriate wages for specific job functions occur. And that should drive proper behavior.

Elliot Dinkin is president and CEO at Cowden Associates, Inc., specializing in helping corporate clients find the best solutions, both for the enterprise and its employees, with regard to compensation, healthcare benefits, retirement and pension issues, and Taft-Hartley fund consulting.