The U.S. Department of Labor is again attempting to make more white-collar workers eligible for overtime under the Fair Labor Standards Act. Most employees making less than $455 a week, or $35,308 a year, will need to be paid overtime under a new rule proposed March 7.
In setting this new threshold, the DOL split the difference between the current white-collar overtime threshold of $23,600 a year and $47,476 — the line the agency set under the Obama administration. That rule, which a federal judge struck down in November 2016 before it could take effect, had employers scrambling to identify which workers they would have to switch to hourly or keep exempt through raises or other adjustments.
The new rule under the Trump administration will still prompt employers to audit their workforce for FLSA compliance but for a smaller population of employees. It will also have Colorado employers paying more attention to the FLSA’s “highly compensated employee” exemption, employment attorneys say.
The salary threshold is just one requirement an employee must meet in order to be exempt from overtime pay. The worker’s job must also be considered executive, administrative, professional or outside sales under the FLSA. The new rule, which will make an estimated 1.1 million more workers eligible for the white-collar exemption, is significant but less of a shock to employers than its previous iteration, which would have covered an additional 4.2 million.
“I think most employers realize there needs to be some kind of an increase” to update the threshold from 2004, said Christine Lamb, a labor and employment attorney who is a founding partner of Fortis Law Partners in Denver. She added that the proposed threshold of about $35,000 is “a lot more palatable” for her clients than the $47,000 proposed under the Obama administration.
Preparing for the $47,000 minimum “was a frenzy” for employers, said Austin Smith, managing shreholder of Ogletree Deakins Nash Smoak & Stewart’s Denver office. “This time it’s more of an interested review of the regulations.” Giving an example of the difference, Smith said he’s currently working with a large employer that had hundreds of workers affected by the Obama overtime rule, “and this time it could be a dozen, maybe less.”
The proposed rule’s changes will be most felt by the retail and food service industries as well as nonprofits, where frontline managers have lower salaries that fall under the $35,000 ceiling. But Colorado, having higher median wages than most states, should see fewer employees affected overall. “I think this is going to be a bigger issue in lower income areas and industries that have lower paid frontline managers,” Smith said.
Office workers whose duties don’t fall under those white-collar categories could still be exempt from overtime if they fit the FLSA’s separate, less stringent duties test for “highly compensated employees” earning at least $100,000 a year.
“The benefit of falling under the highly compensated employee exemption is it has a less rigorous duties test,” said Martine Tariot Wells, a wage-and-hour-focused shareholder at Brownstein Hyatt Farber Schreck. The HCE exemption tends to be “a great fit for weird positions” one might see at startups covered by FLSA, she added. Wells also noted that Colorado law doesn’t have an HCE exemption, so there’s a chance that Colorado employers who have been compliant with federal overtime laws might be out of step with state statute when it comes to those workers.
The proposed rule actually raises the highly compensated employee threshold higher than the Obama-era’s mark. It will remove exemption from about 200,000 HCEs as opposed to 65,000, the DOL estimated. For that reason, the HCE prong of the rule might deserve more attention than the white-collar threshold.
“I wouldn’t be surprised if that change affected Colorado employers more than the bottom threshold,” Lamb said.
If a worker’s annual wages don’t quite reach the threshold for exemption, employers would have some options to keep those workers salaried. The proposed rule allows employers to count nondiscretionary bonuses, up to 10 percent of the salary threshold, toward the exemption line. They can also give the employee a single “catch-up” payment at the end of the year to get that employee to the threshold.
Another significant departure from the Obama overtime rule is way the DOL would raise the thresholds going forward. The previous rule had a provision to automatically update those levels every three years. But in the new rule under the Trump administration, the DOL would instead issue a new rulemaking process every four years to propose those changes.
“I think employers like that because it will provide another opportunity for public comment,” Lamb said. “It gives employers at least a voice as opposed to the automatic update.”
Like the Obama-era rule, this proposed rule might still face a legal challenge from employer groups despite its more moderate changes. Smith expects the proposed rule should pass legal muster where its predecessor failed.
“I think that it is likely that this proposal will become a regulation,” Smith said. “I’m telling folks to go ahead and plan on it.”
Once the proposed rule is published in the Federal Register, the public will have 60 days to comment on it.
— Doug Chartier