In a White House ceremony on Thursday, March 13, 2014, President Barack Obama signed a memorandum ordering the Secretary of Labor to “propose revisions to modernize and streamline the existing overtime regulations” governing the Fair Labor Standards Act (FLSA). The memorandum is available here. Although the president did not direct specific changes, he clearly stated that the goal of any regulatory changes would be to make more workers eligible for overtime pay under federal law. The president’s directive is expected to lead to proposed rules that would require employers to pay overtime to millions of workers who are currently classified as exempt employees. All Department of Labor (DOL) proposals that spring from the directive must go through the formal rule-making process and will be subject to public comment before being implemented, but employers should prepare for a regulatory fight in 2014 and new overtime rules in place by 2015.

Changes Expected to the Threshold Amount for Salaried Employees

Under existing FLSA regulations, last updated in 2004, salaried employees who earn at least $455 a week ($23,660 a year) and work in certain specified job categories (the most common are executive, administrative and professional employees) are exempt from the FLSA’s overtime requirement. In a Fact Sheet issued by the White House after the president signed the memorandum, the administration said that the $455 threshold has “failed to keep up with inflation, only being updated twice in the last 40 years and leaving millions of low-paid, salaried workers without these basic [overtime] protections.” The Fact Sheet noted that the threshold would leave a worker with a family of four below the poverty line. It is available here. The administration is expected to propose a significant increase in the threshold amount and perhaps to tie further increases in the threshold to inflation, automatically raising the amount every year without separate rulemaking. In a White House briefing before the presidential memorandum was issued, a member of the President’s Council of Economic Advisors noted that there are more than three million employees who would be covered by overtime rules if the threshold had kept pace with inflation. The presidential memorandum did not set a new threshold amount, however, so we will not know how significant the increase will be until formal proposals are released later this year.

Other Changes Could Pose Challenges for Employers

Although an increase in the minimum salary level will require overtime pay for more employees, another challenge for employers could occur with changes to the “duties test” for exempt workers. Under the FLSA, the DOL is authorized to set the criteria for which workers’ job duties qualify for the executive, administrative and professional exemptions. DOL regulations also control the duties required to qualify for other common exemptions, such as computer professionals and outside or inside salespersons. Changes to the duties tests for these exemptions could be proposed, including a requirement that an exempt employee spend a percentage of his or her working time performing job duties that fit within the categories. When the new proposed regulations are released, employers will need to assess whether the proposals will alter which of their employees can be classified as exempt.

Next Steps

Updating the overtime rules requires a formal regulatory process and the initial work of revising the regulations goes to the Department of Labor. Secretary of Labor Tom Perez can be expected to move swiftly on the president’s instructions, but the formal rule-making process gives employers and the public the opportunity to provide comments that the DOL must then take into account before final rules are adopted. Further updates will be distributed as the process moves forward. In the meantime, we are happy to discuss with you potential impacts of any proposals and to assist you or your organization in preparing comments for the DOL’s review as part of the rule-making process.