The Feds Look to Expand the Current Overtime Rules
For the first time since 2003, the Department of Labor is reviewing options to overhaul the overtime rules for American workers. Following an executive order from President Obama, the Department has developed a set of proposed rules and opened a 60-day period for the public to make comments on how the expanded rules would affect their businesses and lives. Overtime pay is governed by the Fair Labor Standards Act which is enforced by the Department and covers the majority of private and government workers at both the local, state and federal levels.
New Overtime Thresholds
The key provision of the proposed rule changes would slightly more than double the salary threshold for overtime eligibility from $23,660 per year or $455 per week to $50,440 per year or $970 per week for employees classified as executive, administrative or professional (EAP). Another group, the highly compensated employees (HCE) would see their base rise from $100,000 to $122,148. Certain employees of the motion picture industry would have a different base of $1,404 per week instead of the old amount of $695.
Other Issues In the Proposed Rule Changes
In addition to the increase in the base salary exemption amounts, the Department also seeks comments on several other issues during the 60-day period. These issues included automatic indexing of future exemption amounts, whether to include non-discretionary bonuses in the base salary and a refinement of the duties test.
Indexing of Future Exemption Base Salaries
The Department proposes to have the exemption amounts in future years tied to an index such as the Consumer Price Index (CPI). The CPI is a well-known and established index that measures inflation across a broad number of common consumer items. It is used as a basis for many other pricing adjustments such as the annual adjustments to Social Security payments. Using the CPI, would adjust the exemption level based on inflation from year to year.
Alternatively, the Department is considering tying the annual exemption level changes to a percentile of all weekly full-time wages as published by the Bureau of Labor Statistics. The proposed rule would select the 40th percentile as the basis for the annual changes. Using this method, the Department feels that market conditions would be reflected in the annual adjustment.
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The Question of Non-discretionary Bonuses
Historically bonuses have not been figured into the exemption thresholds. Now the Department is seeking comments on what types of bonuses are paid and what affect they should have. While the highly compensated employees must be paid $455 as a weekly base, the balance of their $100,000 annual income can be made up of non-discretionary income such as bonuses, commissions and other forms of compensation. The proposed rules would limit the amount of this form of compensation to 10% of the exemption base.
In considering the other changes, comments on whether the duties test is working appropriately are being sought. Currently, an employee must spend a specified amount of their time performing assigned duties congruent with their primary job to be considered exempt. For an example, an accountant’s primary duty is doing accounting related work, but if the employee spends an inordinate amount of time every week helping pack and ship product, then the employee fails the duties test and is legible for overtime pay. The State of California has set as a benchmark 50% of the employees time as the amount spend on their primary function, and the Department is considering using that as the national standard as well.
Consequences of Expanding Overtime
Recent studies by the National Retail Federation (NRF) suggest that the cost to business to convert now salaried employees to hourly non-exempt workers would be in excess of $800 million dollars and that overtime would surpass the $9.5 billion mark. Likely, employers would reduce the number of full-time employees to compensate for this increased expense burden. The NRF also believes that real wages will go down as a result of the proposed expansion and that there would be other issues as a consequence of these changes. Reclassifying employees from salary to hourly would lead to decreased motivation and productivity according to the study’s authors.
Conversely, the Department’s own research believes the real cost to employers would be in the $250 million range. Employees would benefit from an increase in their paychecks of $1.18 – 1.27 billion dollars.
The Department will accept written comments from interested parties until the end of the 60-day public comment period which runs to September 4, 2015. After the comment period closes the Department will review the public comments and will then draft its final rules for publication. That process could take as much as several months to several years to complete. The last time overtime rules were reviewed in 2003, it took thirteen months before the final rules were published.
From the Author:
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