Employers: Warning! Your Overtime Costs Are About to Go Up
Whether they know it or not, virtually all employers in America are about to face a significant increase in their overtime pay obligations. The time to start thinking about the budget implications of that fact is now. For North Carolina governmental employers, the impact is likely to hit in the middle of fiscal year 2016.
Last March, President Obama directed the U.S. Secretary of Labor to modernize the federal Fair Labor Standards Act regulations. The draft regulations are due to be published this month. It is widely thought that they will significantly raise the minimum salary required for a position to be classified as exempt from overtime premium pay. Currently, an employee who makes as little as $23,660 a year can be classified as an exempt executive, professional or administrative employee and not earn overtime. But some claiming an inside track to Department of Labor thinking predict that the DOL will raise the minimum salary to $42,000 per year. Open letters to the Secretary of Labor from a group of labor economists and from a group of Democratic lawmakers have urged respectively that the minimum salary be raised to $50,000 and $56,680 per year. Another group of lawmakers has advocated for an increase to $69,000. These changes to the FLSA regulations do not require Congressional approval. They will happen. Whatever the final figure, a change in the minimum salary threshold will have a significant impact on local government budgets as a far greater number of employees will have to be paid overtime whenever they work more than 40 hours per week, regardless of their job duties or position titles. Background Under the Fair Labor Standards Act, an employee is entitled to overtime pay after working 40 hours in a week, unless an exemption applies. If an exemption applies, the employee is said to be “exempt” and is not entitled to overtime pay even at 60 or 80 hours worked in a week. Positions can be exempt from the FLSA’s overtime rules if they the requirements of the executive duties test, the administrative duties test, or the professional duties test. But even if a position satisfies one of the three duties tests, if it does not pay a minimum of $455 per week, or $23,660 on an annualized basis, it cannot be classified as exempt under any circumstances. For discussions of the executive duties test, see here, the administrative duties test, see here and here, and the professional duties tests, see here and here. The amount of the minimum salary threshold is not set forth in the Fair Labor Standards Act itself. The authority to set the threshold is delegated to the Department of Labor. President Obama’s Directive to the U.S. Department of Labor When President Obama directed the U.S. Secretary of Labor to revise and modernize the overtime rule, he noted that “ . . . . [the] regulations regarding exemptions from the Act's 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.” To read the memorandum, see here. In an accompanying press release, the White House Press Office observed that “workers who are paid hourly wages or who earn below a certain salary are generally protected by overtime regulations, while those above the threshold who perform executive, professional or administrative duties are not. That 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 protections.” In 1975 the Department of Labor set the threshold below which employees were entitled to overtime pay at $250 per week, which was revised upward in 2004 to $455 per week. The press release notes that $455 per week “is below today’s poverty line for a worker supporting a family of four, and well below 1975 levels in inflation adjusted terms.” The press release continued:
Today, 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). Many of the remaining 88 percent of salaried workers are ineligible for these protections because they fall within the white collar exemptions. Many recognize that these regulations are outdated, which is why states like New York and California have set higher salary thresholds.
To read the full press office statement, see here. The President did not instruct the Secretary how to revise the regulations, but in light of the language of the memorandum and press release, the intent is widely understood to bring more employees out of exempt status and to give them the benefits of overtime compensation. Possible changes include:
- raising the minimum salary that an employee must earn to a level significantly higher than $455 per week ($23,660 on an annualized basis);
- putting a limitation on the amount of nonexempt work that an employee may perform and keep his or her exempt status; and/or
- revising the executive, administrative and professional duties tests, which were last revised in 2004.
The draft regulations were originally due to be published in November 2014, but in December that date was pushed back to February 2015. Given that the proposed regulations have not yet been submitted to the Office of Management and Budget for approval (see below), it is doubtful that the deadline will be met. Possible Changes to the Salary Threshold Meanwhile, speculation runs rampant, particularly with respect to the salary threshold. According to a recent article in the Huffington Post, one economist with close ties to the White House thinks that DOL is leaning toward an increase in the salary threshold for exempt status to $42,000. He estimates that a $42,000 threshold would bring approximately 35% of salaried employees into nonexempt, overtime-earning status. In early January, a group of leading labor economists published an open letter to Secretary of Labor Perez urging him to adopt a threshold of $50,000, arguing that “[t]his level restores the 1975 threshold, adjusted for inflation, a level we view as reasonably balancing the goals of overtime standards and the flexibility intended by the law.” On January 19th, 32 House Democrats sent an open letter to President Obama urging him to increase the annual salary level required for exempt status to $69,000 per year. They noted that in 1975, 65 percent of American salaried workers fell below the salary threshold and observed that to cover 65 percent of salaried workers today, the income threshold would have to be $69,000 a year. The text of the letter can be found here (below the press release). On January 30th, a group of Senate Democrats sent an open letter to President Obama urging him to increase the annual salary required for exempt status to $56,680 and to index the number to inflation. The text of the letter can be found here (below the press release). An article on the website Politico speculates that DOL may propose two alternative minimum salary thresholds and ask for public comment. When Will the Proposed Rule Be Published and When Will the Final Rule Be Effective? The Proposed Rule The process of federal rulemaking is a lengthy one. DOL will submit a draft to the Office of Information and Regulatory Affairs of the federal Office of Management and Budget (OMB). OMB will review the draft over a period of one to three months. Once OMB approves the draft, DOL will publish it in the Federal Register and the federal Administrative Procedure Act will then require a period of thirty to sixty days during which the public may submit comments. The Final Rule Once the comment period closes, DOL will then write a final rule. The final rule may be very different from the draft rule or it may be virtually identical. DOL must submit the final rule to OMB before it may publish it in the Federal Register in the form of a Notice of Rulemaking. Final rules generally take effect 30 days after publication, but as this is likely to be a significant rule, it may have an effective date 60 days after publication. A Guestimate about Timing Federal agencies are required to announce that they have submitted a draft rule to OMB for approval. As of today, DOL has made no such announcement. So even if DOL were to finish a draft rule by March 1, it is not likely to receive OMB approval and publish the draft any earlier than April 1 -- with May 1 perhaps being a more likely publication date. The comment period would then likely close somewhere between June 1 and July 1. If DOL completed the final rule and submitted it to OMB by September 1, publication of the final rule could come sometime in October, with an effective date sometime before the end of the year. That would seem to be the earliest date the rule could be effective. It may (and maybe likely to) take much more time than that. How the Revised Regulations Will Effect North Carolina Local Governments Whether DOL merely raises the minimum salary required for an employee to be exempt or whether it also revises the duties tests, the result of the new rule will be that more positions will be classified as nonexempt and more employees will earn overtime. We can get some idea of how a change in the minimum salary required for exempt status will play out in North Carolina local government by taking a look at the School of Government’s County Salaries in North Carolina 2014. Take, for example, the position of risk manager. It is probably an exempt position. No county now pays its risk manager less than $42,000 per year, but eight of the twenty-four North Carolina counties that had a separate risk manager position pay less than 50,000 per year. Those eight positions would become nonexempt if DOL adopts a $50,000 threshold. In 24 of the 42 counties reporting salaries for the position of purchasing agent (another position that is likely exempt), the salary was below $50,000; in 30 counties the position paid less than $56,680. So depending on the salary threshold DOL adopts, somewhere between 24 – 30 county purchasing agents may become nonexempt. The position of parks and recreation director may also be an exempt position. Of the 63 North Carolina counties with such positions, 14 of them reported average salaries below $42,000; 27 of them reported average salaries below $50,000. Those 14 with salaries less than $42,000 seem almost certain to become nonexempt, while another 13 are at risk if DOL chooses the higher threshold. Finally, of the 65 counties reporting salaries for the position of planning director (also probably exempt today if the planning department has at least two other employees), only 6 reported actual salaries below $50,000. If DOL were to adopt the recommendation that the salary minimum be $56,680, 11 counties would find that their planning director could not be classified as exempt. If the Secretary adopted the recommendation to raise the salary minimum to $69,000, 33 counties would find their planning directors nonexempt on the basis of salary level. I cite these examples not to single out any county or salary but to show how many positions in both counties and municipalities are likely to become subject to overtime if DOL increases the salary-basis minimum to an amount close to $50,000 or $56,680. But even if DOL chooses a number closer to $40,000, that will still likely entail a substantial number of reclassifications. What Should Local Governments Being Doing to Prepare for the New Regulations? Whatever the effective date of the final rule turns out to be, it is likely to be in the middle of FY 2016 for North Carolina local governments. In the meantime, therefore, local governments should build into their FY 2016 budgets the flexibility either a) to raise the salaries of some employees to keep them exempt, or b) to begin paying them overtime for all hours worked over 40, or c) to hire additional full- or part-time employees to keep formerly exempt employees from exceeding 40 hours per week. Remember, these revisions to the FLSA regulations will be made at the discretion of the Secretary of Labor and the President. Congressional approval is not needed. The question is not whether the minimum salary needed for exempt status will change; it most certainly will. The question is how much, and how many currently exempt employees will suddenly become eligible for overtime premium pay.
