The Department of Labor proposed a rule change in 2016 to the Fair Labor Standards Act (FLSA) Overtime Rule. It was supposed to take effect in December 2016, but has not become law yet. The rule change increases the number of workers that are eligible for overtime pay and is expected to affect over 4.2 million workers in the United States.
What Does the Rule Say?
The rule currently in effect says that EAP (executive, administrative, and professional) employees covered by the FLSA, who make less than $23,660 a year, are eligible for overtime pay even if their employer considers them “salaried.” These employees must be paid time-and-a-half for all hours worked over 40 in a week. The rule does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime hours are worked on such days.
The new rule raises the salary level for EAP employees to $47,476, meaning that many more workers will become eligible for overtime pay even though they are now considered salaried and exempt. It also allows the salary level to be updated every three years, with 150 days’ advance notice. Other provisions of the law, such as the duties test, remain the same.
The new rule was proposed to increase the access to overtime pay for low-pay, otherwise overtime-exempt, employees who work long hours.
Employers with employees that are subject to the new requirements, can either raise their salaries above the new level or convert those employees to hourly wages. Employers may also use “nondiscretionary bonuses and incentive payments (including commissions)” for up to 10 percent of the new salary level.
Many employers, such as Wal-Mart, have already raised salaries above the new cap, exempting those workers from overtime pay. Wal-Mart’s assistant managers and some other managers now make $48,500, up from $45,000.
David Weil, administrator of the Labor Department's Wage and Hour division, said there are options to comply and employers can use the rule change to become more economically efficient. "The overtime rule is not a straitjacket," he said. "A lot of people have reassessed how they're using people" because of the rule change.
Fazoli's Chief Executive Carl Howard said his restaurant chain couldn't afford to raise salaries for its assistant managers. (They generally earn in the low $30,000s, he said.) Yet, he wants them to continue working 45 hours a week, as they do now, without cutting pay. So, Howard said he will make them hourly employees at rates low enough to fund a 45-hour week, including five hours of overtime at time-and-a-half. He also is offering a bonus pool to be split among the assistant managers if they can stick to their work hours.
Who is Affected?
The first requirement for affected employees are that they must be covered under the Fair Labor Standards Act (FLSA). There are two ways to be covered under FLSA: enterprise coverage and individual coverage.
Enterprise coverage provides coverage for employees of businesses with two or more employees, who have annual sales of more than $500,000, or are “hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies.”
Individual coverage provides coverage to employees whose work involves them in “interstate commerce.” This includes those "engaged in commerce or in the production of goods for commerce."
“Examples of employees who are involved in interstate commerce include those who: produce goods (such as a worker assembling components in a factory or a secretary typing letters in an office) that will be sent out of state, regularly make telephone calls to persons located in other States, handle records of interstate transactions, travel to other States on their jobs, and do janitorial work in buildings where goods are produced for shipment outside the State. Also, domestic service workers (such as housekeepers, full-time babysitters, and cooks) are normally covered by the law.”
The second requirement for affected employees is that their work duties include mostly executive, administrative, or professional services.
Employees that are covered by the FLSA and perform mostly EAP duties will be subject to this new rule. Those that earn over $47,476 and are paid on a salary basis, are exempt from this rule. Those that earn under $47,476, will need to be paid time-and-a-half for any hours over 40 in a week, even if they are considered a salaried employee.
What is the Purpose of the New Rule?
The new rule was proposed to increase the access to overtime pay for low-pay, otherwise overtime-exempt, employees who work long hours. Though the new rule is expected to hit the retail, hospitality, government, and nonprofit sectors the hardest, the construction industry will not be immune to its effects.
Why Isn’t the Rule in Effect?
Due to a lawsuit filed by 21 states and 50 business groups, a federal district court judge has suspended the activation of the law. The lawsuit alleges that the rule oversteps the government’s authority. Many believe that President Donald Trump will act to repeal the rule as soon as he is able.
The Department of Labor has filed an appeal challenging the district court judge’s preliminary injunction blocking the rule.
What Will Happen Next?
Trump’s nominee for secretary of the Department of Labor, Andrew F. Puzder, who’s confirmation hearing has been postponed, could withdraw the appeal of the lawsuit or begin the rulemaking process to change the regulation. Congress could also pass legislation nullifying the regulation.
What happens next remains to be seen. Trump has promised more business-friendly legislation and a reduction in regulations on businesses. Whether that includes the new overtime rule only he knows.
For more information on the FLSA Overtime Rule, visit the Department of Labor.