Hunton Employment & Labor Perspectives

During his most recent State of the Union Address on January 28, 2014, President Barack Obama stated that one of his top priorities in the coming year was to address what he described as “stagnant wages.”  More importantly, he warned Congress that if they did not take steps to tackle the issue soon, he was prepared to attempt to address the issue unilaterally through exercise of his executive power.

In furtherance of this agenda, President Obama recently sent a memorandum to Secretary of Labor Thomas Perez directing the United States Department of Labor (“DOL”) to reform the current white collar exemptions under the Fair Labor Standards Act (“FLSA”) to attempt to increase the number of persons entitled to overtime under the FLSA.

The FLSA’s white collar exemptions exclude from the FLSA’s overtime and minimum wage requirements employees employed in a “bona fide administrative, executive, or professional capacity.”  29 U.S.C. § 213(a)(1).  However, the FLSA does not define these terms and instead specifically empowers the Secretary of Labor to define the scope of the white collar exemptions. Id.  This, in turn, gives President Obama and Secretary Perez the authority to make “unilateral” changes to these exemptions without Congressional input or approval.  Id.  The fact that the FLSA gives the Secretary of Labor the authority to define the scope of the exemptions also means that the Secretary’s regulations on this issue have the force and effect of statutory law to which the courts must defer, which is very different from most other FLSA regulations issued by the Secretary that function as non-binding interpretive guidance.

The current white collar exemption regulations went into effect in 2004.  They provide an exemption to employees who receive at least a $455 weekly salary  and whose primary duty satisfies one of three specifically-enumerated duties test. 

In his recent memorandum entitled “Updating and Modernizing Overtime Regulations,” President Obama indicated that the white collar exemptions “have not kept up with our modern economy” and that, “because these regulations are outdated, millions of Americans lack the protections of overtime and even the right to the minimum wage.”  Accordingly, President Obama directed Secretary Perez to “propose revisions to modernize and streamline the existing overtime regulations.”  In doing so, President Obama instructed Secretary Perez to “consider how the regulations could be revised to update existing protections consistent with the intent of the Act; address the changing nature of the workplace; and simplify the regulations to make them easier for both workers and businesses to understand and apply.”

Though President Obama did not specify what specific revisions he wanted the DOL to make, it seems likely that the DOL will target three key areas.  First, the DOL will likely seek to increase the current $455 minimum salary requirement.  This minimum salary amount has been in effect since 2004, and it has not been adjusted for inflation or today’s cost of living statistics.  The Obama DOL likely views the $455 minimum salary requirement (which essentially works out to a minimum annual salary of $23,660 or $13.78 per hour for a standard, forty-hour workweek) as too low a salary to warrant exempting an employee from the FLSA’s overtime protections.  Numerous state’s wage and hour laws already have in place a higher minimum salary requirement.  For example, California’s minimum salary requirement is currently $640 per week and will increase to $800 per week in 2016, and New York’s minimum salary requirement is currently $600 per week and will increase to $675 per week in 2016.  The DOL would likely use these states’ minimum salary requirements as a starting point in any revisions it makes to the current salary basis requirement.

Second, the DOL’s proposed revisions to the salary basis test may include a requirement that the salary be sufficiently large to ensure that the employee’s salary provides at least minimum wage (or some other minimum regular rate of pay) for all hours worked in a workweek.  Such a requirement is already contained in the DOL’s fluctuating workweek regulations, 29 C.F.R. § 778.114(a) and (c), and though that requirement deals with the calculation of overtime for non-exempt employees who are paid a salary, the DOL may find it appropriate to import a similar concept into the salary basis requirement.  President Obama signaled this potential revision in a recent press conference he gave regarding his March 13 memorandum, in which he remarked that the current salary basis rule “actually makes it possible for salaried workers to be paid less than the minimum wage” because “if you’re working 50 or 60 or 70 hours – your employer doesn’t have to pay you a single extra dime.”

The third anticipated change is likely to include more of a bright-line test for the duties portion of the white collar exemptions, especially the executive exemption that applies to managers and supervisors.  Speaking at a recent union conference in Washington, D.C., Secretary Perez described the current “primary duty” test under the regulations as a “loophole” because, as he understands the primary duty test, “somebody can work 1 percent of their time on management issues, 99 percent stacking the shelves and doing other work that has nothing to do with management, and you’re considered a manager, and you are no longer entitled to overtime.” Thus, it seems likely that the DOL will attempt to make the “primary duty” test for each of the exemptions more black and white and will likely require that employees spend certain percentages of their weekly time engaged in certain exempt duties in order to be exempt, which is similar to the time-based approach the DOL took prior to the 2004 revisions.

All of these anticipated changes are likely to have a significant impact on employers across all industries, particularly those employers with a lot of front-line managers and assistant managers classified as exempt and those employers that use the professional and administrative exemption for many of their entry-level positions.  The anticipated increase in the minimum salary requirement could mean that employees making as much as $40,000 to $45,000 may fall below the new minimum salary requirement.  In our experience, regardless of industry, it is not uncommon for employers to have a host of employees making between $30,000 and $45,000 per year classified as exempt.  Depending on the final weekly number established by the revised regulations, employers would have to increase those salaries to continue to maintain the exemption or else reclassify those positions as non-exempt and pay the employees overtime. 

Moreover, it is not unusual for many front-line and/or assistant managers to perform significant non-exempt duties, all while maintaining their primary duty of supervising two or more employees.  If the DOL implements a certain percentage requirement for these supervisory duties, these employees may no longer meet the duties test under such a requirement unless the employees spend the overwhelming majority of their time engaged in the supervisory duties.

To date, the DOL has given no indication as to when it will publish its proposed revisions to the white collar exemptions.  But once the DOL publishes the proposed revisions in the Federal Register, there will a notice and comment period wherein employers can evaluate the proposed revisions and submit comments to the DOL for consideration.  We encourage employers to actively participate in the notice and comment process to ensure that the DOL receives as much feedback from the employer community as possible before it decides on the specific scope of its final revised regulations.