Proposed Changes Under the Fair Labor Standards Act Could Require Overtime for Managers
By John R. Hunt Attorney, Stokes Wagner Hunt Martez & Terrell, ALC | December 13, 2015
For the past decade, employees who earned over $23,660 per year generally were exempt from federal overtime requirements if they were paid on a salary basis and performed certain well-defined duties. The United States Department of Labor ("DOL"), however, recently proposed changing its regulations to more than double this minimum amount to $50,440 per year. The DOL also solicited comments from the public about whether future increases should be automatically implemented based on fluctuations in the consumer price index. If the regulation becomes final, it will have a substantial effect on how hotels pay their managers, assistant managers and supervisors. This article discusses the impact of the proposed changes on the hospitality industry.
The federal Fair Labor Standards Act (FLSA) guarantees employees the payment of minimum wages and overtime compensation. Since its enactment in 1938, the FLSA has required that most workers within its coverage must receive overtime pay of at least 1.5 times their regular rate of pay for all hours worked in excess of 40 hours per week. At the same time, the FLSA has excluded certain occupations from its overtime requirements.
The FLSA also has broadly exempted those employees who work in executive, administrative or professional capacities as well as those employed as outside sales persons, from the payment of overtime. These are referred to as the "white collar exemptions" and have applied to the hospitality industry since Congress first extended the FLSA's overtime coverage to hotels in 1974. The rationale underlying the exemptions is that "white collar" employees earn salaries that are well in excess of the minimum wage. Further, such employees receive additional benefits that compensate them for long workweeks, such as above average fringe benefits, job security and better opportunities for promotions than hourly employees.
Although the language of the FLSA itself authorizes the white collar exemptions, Congress delegated the task of defining their meaning to the DOL. Over the years, the DOL's Wage and Hour Division has issued a series of regulations that set out the requirements for determining which employees qualify for the white collar exemptions. For example, in 2004 the DOL completely rewrote its regulations in an effort to make the requirements for the exemptions easier for employers to follow. The 2004 revisions established a new threshold for the minimum amount of salary that an employee must earn in order to be considered exempt from overtime. The DOL also clarified the duties that an employee must perform to qualify as an executive, professional or administrative employee.
In March 2014, President Obama sent a memorandum to the DOL stating that the 2004 regulations had not "kept up with our modern economy." He described the existing regulations as "outdated" and that as a result, "millions of Americans lack the protections of overtime …." The President directed the DOL to propose changes that would "modernize and streamline" the regulations. He said the DOL should consider the "changing nature of the workplace" and ways in which the regulations could be simplified.
Approximately a year later, in July 2015, the DOL responded by issuing a proposed regulation that would significantly alter the white collar exemptions. The DOL estimates that this new regulation ultimately could affect 21,400,000 employees who presently are classified as exempt from overtime. The prospect of such a sweeping reclassification of so many positions results from a proposed change in one of the most fundamental aspects of the 2004 regulations.
In general, an employee must satisfy three basic requirements to come within the white collar exemptions. The first is the so-called "salary basis test" under which an exempt employee must receive a salary that cannot be reduced under most circumstances, such as when the employee is sick or receives disciplinary action. Second, the employee must meet a "salary level test" under which the employee must receive a minimum amount of salary. In most cases, this presently is at least $455 per week or $23,660 annually. Finally, for each of the exemptions, the DOL has established a "duties test" which defines the particular job duties an individual must perform in order to qualify for the particular exemption (i.e., executive, administrative, professional, outside sales). Most litigation concerning the white collar exemptions has focused on whether the position in question satisfied the relevant duties test. Litigation challenging compliance with the salary level and salary basis tests has almost been incidental by comparison.