New Overtime Rules May Affect Your Clients

By: Miles Pringle

June 2016

Attorneys advising businesses should be aware that the U.S. Department of Labor (“DOL”) has greatly modified an exemption to the Fair Labor Standards Act (“FLSA”) relating to overtime pay.  In general, FLSA requires that employees of enterprises with an annual gross profit over $500,000 are entitled to overtime pay for working in excess of 40 hours per week; however, there are some exceptions.  The DOL has modified one such exception contained in 29 C.F.R. Part 541, which provides FLSA overtime requirements do not apply to employees employed in a bona fide executive, administrative, or professional capacity who are paid an annual salary above an amount set by the DOL.  This exemption is often referred to as the “White Collar” or the “EAP” exemption.

At the outset it should be noted that the rule changes are unlikely to affect law firm employees because overtime rules do not apply to practicing attorneys[1], and paralegals and legal assistants generally do not qualify for the White Collar exemption addressed by the DOL.  Thus, whether or not a law firm’s employee is entitled to overtime pay will likely remain the same. 

Previous to the rule change, the White Collar exemption applied to covered employees making more than $23,660 per year.  The DOL has raised that minimum salary to $47,476 per year effective December 1, 2016.  This new dollar figure was pegged in relation to “the 40th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region [the South]”.[2]  The DOL anticipates this move will extend overtime pay to 4.2 million Americans, and that others will receive pay bumps to bring their salaries over minimum threshold.  In Oklahoma the DOL expects the new rules to affect almost 48,000 workers.

Affected employees are those who meet the duties test(s) for executive, administrative, or professional positions.  To meet the White Collar exemption now, an executive employee must: 1) make $47,476 or more; 2) whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; 3) who customarily and regularly directs the work of two or more other employees; and, 4) who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.[3]

For an administrative employee that means: 1) making $47,476 or more; 2) whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and, 3) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.[4] Examples of administrative employees include insurance claims adjusters if their duties involve interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation.[5]  Another example is human resources managers “who formulate, interpret or implement employment policies and management consultants who study the operations of a business and propose changes in organization generally meet the duties requirements for the administrative exemption.  However, personnel clerks who ‘screen’ applicants to obtain data regarding their minimum qualifications and fitness for employment generally do not meet the duties requirements for the administrative exemption.”[6]

A qualifying professional employee is one who makes $47,476 or more, and whose primary duty is the performance of work: i) Requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or ii) Requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.  Examples of professional include accountants, registered nurses, physician assistants, executive chefs and sous chefs (but not cooks who perform predominantly routine mental, manual, mechanical or physical work).[8]

Thus, employees who meet these tests, but are paid less than $47,476 per year, are now entitled to overtime pay for work in excess of 40 hours per week.  It should be noted that the DOL also amended the rules so that bonuses and incentive payments can count up to 10 percent an employee’s salary, if the bonus or incentive is paid at least quarterly.  Employers will need to keep track of employees’ hours to ensure that they are complying with the FLSA.

The reasoning for doubling the qualifying amount for the white collar exemption appears to be two-fold. First, the DOL and the Obama Administration are attempting to boost wages for lower and middle class workers.  The administration put out a press release stating that the new rule “is expected to boost wages for workers by $12 billion over the next ten years”, and quotes President Obama: “We’re making more workers eligible for the overtime that you’ve earned.  And its one of the single most important steps we can take to grow middle-class wages.”[9]  It should be noted that there are several pundits and academics who dispute whether this policy accomplishes the goals set out by the Administration.   

The second goal appears to be to reinforce the 40-hour work week as the standard for American work life.  In its press release, the Administration states: “the 40-hour workweek was a pillar of economic security for working families… This left most Americans with more money in their pockets, more time to balance obligations at home and at work, and the opportunity to get ahead with more time outside of work for school or additional training.”  Whether the 40-hour workweek needs protecting is an open question. According to DOL numbers, the average weekly hours on private nonfarm payrolls are 34.5 hours;[10] however, American workers report to pollsters that they are working “an average of 47 hours per week”.[11]

Attorneys advising businesses may need to alert their clients to the change in the overtime exemption.  As a resource, the DOL has many publications addressing the rule change and other rules relating to the FLSA.

[1] See e.g. 29 C.F.R. § 541.204.

[2] See e.g. 29 C.F.R. § 541.100.

[3] Id. 

[4] 29 C.F.R. § 541.200.

[5] 29 C.F.R. § 541.203.

[6] Id.

[7] 29 C.F.R. § 541.300.

[8] 29 C.F.R. § 541.301.

[9] The White House, Office of the Press Secretary, “FACT SHEET: Growing Middle Class Paychecks and Helping Working Families Get Ahead by Expanding Overtime Pay”, published May 17, 2016, available at https://www.whitehouse.gov/the-press-office/2016/05/17/fact-sheet-growing-middle-class-paychecks-and-helping-working-families-0 (last accessed May 24, 2016).

[10] DOL, “ESTABLISHMENT DATA: Table B-2. Average weekly hours and overtime of all employees on private nonfarm payrolls by industry sector, seasonally adjusted”, Last Updated May 6, 2016, available at http://www.bls.gov/news.release/empsit.t18.htm (last accessed May 31, 2016).

[11] Saad, Lydia, “The ’40-Hour’ Workweek Is Actually Longer – by Seven Hours”, published August 29, 2014, available at http://www.gallup.com/poll/175286/hour-workweek-actually-longer-seven-hours.aspx (last accessed May 31, 2016). 

©PRINGLE® 2016

This Article was originally published in Oklahoma County Bar Association’s Briefcase Vol. ­­49 No. 6 in June 2016.