Any day now the U.S. Department of Labor will propose new rules that could make up to six million more workers eligible for overtime pay. The regulations, expected as early as this week, are a response to specific direction from President Obama.  

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New Overtime Rules: What to Expect

Tue Feb 24, 2015

Any day now the U.S. Department of Labor will propose new rules that could make up to six million more workers eligible for overtime pay.

The regulations, expected as early as this week, are a response to specific direction from President Obama. 

In an unusual public memorandum to the Secretary of Labor in March 2014 the President asserted that the existing “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 Because these regulations are outdated, millions of Americans lack the protections of overtime and even the right to the minimum wage.”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.”

What to Look For: Salary and Duties Tests
The key question to look for in the new federal overtime regulations will be the issue of exemptions from the overtime pay mandate. Existing federal regulations provide that workers be paid overtime at time-and-a-half their regular rate of pay for hours worked in excess of 40 per week, unless they qualify for one of several exemptions.

Each of these exemption categories, i.e., executive, administrative, professional or outside sales, relies on a two-pronged test: salary and job duties. While media coverage of the rules will no doubt focus on the new salary threshold, for many employers the changes in the job duties tests will be equally important and more difficult to implement.

For example, FLSA-exempt executives today must earn more than $455 per week (about $23,000) and have as their primary duty responsibility for managing the enterprise, or managing a recognized department or subdivision of the enterprise. Executives must also direct the work of other employees and have the authority to hire and fire.

In other words, an executive employee exempt from the overtime mandate must earn more than roughly $23,000 a year and perform specific duties that qualify that employee as an executive.

This two-pronged exemptions test is precisely the area the new Labor Department regulations are expected to target.
First, the weekly salary test will go up—way up. The 2004-set salary test of $455 per week ($23,660 per year), adjusted for inflation, would now be $553, or $28,756. But this would represent no expansion in the number of workers eligible for overtime pay.

Several Democratic members of Congress have written to the President urging that the new threshold be set as high as $54,000, “to catch up with the real world and to catch up with inflation.” One can guess that the Labor Department could propose a salary threshold of as much as $800 a week or some $42,000 a year—almost double the present rate.

Equally important for employers, it’s likely that the traditional “duties tests” for the various exemptions will also be changed dramatically, to keep up with the modern economy, as President Obama put it in his memorandum. Payroll, HR and Compensation professionals need to be prepared for an entirely new—and tighter—template for what constitutes duties that qualify an employee as exempt from overtime pay.

There is also a possibility that in addition to addressing salary and duties exemptions, the new regulations could seek to break new ground in the area of work-life balance by proposing to limit employer flexibility in scheduling or even a minimum rest period. A recent San Francisco law, for example, requires certain employers to give workers extra pay for changing schedules without a required notice period or for on-call hours.

When to Expect New Rules to Take Effect
The only good news about this impending compliance hurricane is that, unlike last fall’s immigration executive action, overtime rules must be changed in accordance with federal administrative procedures. New rules must first be proposed, then the public allowed to comment and lastly final rules will be issued.

With the kinds of sweeping changes being discussed, and literally thousands of public comments expected for and against, the drafting period could last for six months. Final rules might not be promulgated before the end of 2015.

On the other hand, the Department of Labor has broad legal authority to implement new regulations governing the Fair Labor Standards Act, overtime pay and exemptions. In other words, the Republican-controlled Congress, while they may convene hearings to grill regulators and express their opposition, will have little ability to block new rules. One thing is certain about the new federal overtime rules: they will have dramatic consequences for employer wage costs, compliance and scheduling. With the Affordable Care Act employer “play or pay” mandate taking effect this year and more costly and complex federal overtime regulations, 2015 could set the record for compliance change.