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Making Sense of the Proposed Revisions to the Federal Overtime Rules

In June of this year, the United Stated Department of Labor, at the direction of the Obama administration, announced proposed revisions to the "white collar" exemptions to the federal overtime regulations. The proposed revisions, if enacted, will be the first update to those federal overtime exemptions since 2004. The proposed revisions, explained in detail below, are dramatic and demand attention from employers of all types and sizes because the proposed revisions are projected to mandate the payment of overtime to 4.6 million workers in the United States who are not currently receiving overtime, and the news attention alone is likely to cause many employees to questions whether they should be receiving overtime under the current or proposed rules. Employers who ignore this potential development do so at their own risk!

Background: The Fair Labor Standards Act (FLSA) is the federal law that mandates the minimum standards for overtime compensation nationally. This means that states may institute laws and regulations that exceed the national standards, but cannot provide for less overtime protection. For example, California requires an eligible employee is compensated at a rate of 1.5 times his or her base pay for any time worked in excess of eight hours in a single workday even if the employee works less than forty hours in a work week, whereas federal law only requires that a worker receive overtime pay for any time worked in excess of forty hours in a week, regardless of the manner in which the time is accumulated.

With respect to overtime, as stated above, the FLSA mandates that any worker who works in excess of forty hours in a single workweek (a set seven day period) is entitled to 1.5 times his or her base pay for any time worked in excess of those forty hours. Hypothetically, if a worker makes $10.00 per hour and works 43 hours in a single work week, then the worker's gross pay for that week will be $445.00 ((40 hours x $10 per hour) + (3 hours overtime x $15 per hour)).

The FLSA, however, provides some exceptions (or exemptions) to the overtime requirements. These exemptions include but are not limited to farmworkers, computer professionals, and commissioned sales employees.

The exemptions at the center of the proposed revisions are the so-called "white collar" exemptions which includes bona fide executives, administrators, and professional employees under certain conditions. Under the current federal scheme, an employee qualifies for one of the white collar exemptions if the employee is (1) salaried (predetermined fixed salary not subject to reduction based on quality or quantity of work performed); (2) paid more than $455 per week or $23,660 annually; and (3) primarily performs executive, administrative, or professional duties, as defined by the Department of Labor regulations.

If a potentially exempt employee's pay structure and duties do not meet all three conditions, then the employee must be paid overtime for any work performed in excess of forty hours in a single work week, unless the employee is "highly compensated," meaning that he or she earns in excess of $100,000 per year. Any agreement between the employer and employee to the contrary is irrelevant, as is any designation by the employer. Courts will look to the reality of the situation, and not how the employer classifies the employee's designation.

It is important to note that these figures are based on base salary and do not include discretionary bonuses, such as work performance bonuses or end of the year bonuses.

Proposed Rule Changes: There are three proposed rule changes relevant to this article. The first is that the Department of Labor proposed raising the minimum salary threshold from $455 per week (or $23,660 per year) to $970 per week (or $50,440 per year). In other words, even if an employee is salaried and his or her job duties are primarily executive, administrative or professional in nature, then that employee will be entitled to overtime if he or she earns less than $970 per week or $50,440 per year. For example, if an office manager is currently earning $40,000 per year, then he or she is not entitled to overtime under the current rules. If the proposed revisions are enacted, however, then the same employee will now be entitled to overtime pay unless the employer raises his or her salary to (or above) the threshold amount of $970 per week or $50,440 per year. The goal of this proposed change, according to the Obama administration, is to extend overtime benefits to a minimum of forty percent of the nation's work force.

The second proposed rule change would raise the threshold for a "highly compensated" employee from $100,000 per year to $122,148 per year.

The third proposed rule change would create a mechanism for annually updating the minimum salary threshold to ensure that no less than forty percent of the nation's work force is entitled to overtime in any given year. It is projected that the proposed mechanism for adjusting the threshold will result in annual increases of the threshold by approximately 2.4% to 2.6%. In other words, if the threshold for 2016 will be $970 per week or $50,440 per year, then the threshold for 2017 is projected to be at least $1008.80 per week or $52,457.60 per year. This will force employers to grant employees at or near the threshold annual raises if they wish to avoid the overtime requirements.

Presently, these changes will apply to all types of employers - public/private and profit/non-profit - regardless of size.

Penalties: The penalties for failing to comply with the federal and state overtime requirements are strict. An employee can sue for violation pursuant to either the federal or state laws. Pursuant to Pennsylvania's Wage Payment and Collection Act, an employee could recover the unpaid wages, a 25% liquidated damages penalty, reasonable attorneys' fees, and litigation costs. Pursuant to state law, an employee can sue for back wages for the preceding three years, and may initiate a class action lawsuit on behalf of all similarly situated employees.

Employers must also be mindful that is illegal to retaliate against an employee for asking about overtime pay, contacting an attorney, or filing a claim with either the federal or state Department of Labor.

Public Comment: The Department of Labor is accepting public comments on the proposed rules until, as of the writing of this article, at least September 6, 2015. Comments may be submitted to the Department of Labor online or by mail. Employers may submit their comments individually or collectively, through associations or coalition groups. Comments can address any aspect of the proposed changes, including but not limited to the threshold amounts, the mechanisms for annual adjustments, the methodology for calculating an employee's base salary (e.g., whether bonuses should be included), and the type of employers for which the overtime rules should apply (e.g., whether non-profits should be subject to the proposed rule changes in whole or in part).

If you have any questions regarding wage or overtime laws, or the proposed revisions discussed above, you should contact an experienced and knowledgeable attorney for a consultation.

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