March 13, 2014

Overtime Pay Exemptions to Change Pursuant to President Obama’s Directive

By Jason Ritchie 

President Obama signed a Presidential Memorandum today directing Secretary of Labor, Tom Perez, to update the regulations that establish which employees qualify for overtime protection under federal law.  Without directing any specific changes, President Obama indicated that the minimum salary threshold that applies to the “white collar” exemptions needs to be updated.  The intended result of the new rules would be to increase the number of workers who qualify for overtime pay.  

“White Collar” Exemption Salary Threshold Currently Below Poverty Line 

The Fair Labor Standards Act (FLSA), enacted in 1938, is the federal wage law that sets a minimum wage and overtime pay requirement that applies to private sector workers in the U.S.  The most common exemptions from the minimum wage and overtime pay rules are the so-called “white collar” exemptions for executive, administrative and professional workers.  Regulations defining these exemptions allow employers to avoid paying minimum wage and overtime pay for hours worked in excess of forty hours per week for workers who are paid a salary of at least $455 per week and who perform certain executive, administrative or professional duties.  The $455 per week salary threshold was established in 2004 and equates to an annual salary of $23,660.  

The Obama Administration seeks to increase the salary threshold for the “white collar” exemptions which, at $23,660 per year, is below the current poverty line for a family of four. In 1975, the salary threshold for the white collar exemptions was $250 per week.  According to the White House, 65 percent of U.S. workers in 1975 were paid below that threshold, meaning those workers were entitled to overtime pay.  Today however, only 12 percent of salaried workers are paid less than $455 per week.  Consequently, the remaining 88 percent of salaried workers who perform some executive, administrative and professional duties are ineligible for overtime pay and minimum wage protections. 

Retail and Fast-Food Likely To Be Hit Hard 

In his signing conference, President Obama cited two companies, Costco and The Gap, that have voluntarily chosen to pay their workers more than the minimum wage and have reduced employee turnover as a result.  Despite those examples, the business community is already criticizing the initiative, arguing it will increase costs and discourage companies from hiring more workers.  Both the retail and fast-food industries may be hard hit by the proposed changes because supervisors in those industries routinely work 50-60 hours each week and are currently exempt, but may become entitled to overtime pay under the new rules.  The new rules also are intended to curb exemptions for workers who spend the majority of their time stocking shelves or serving customers and a minimal amount of time on exempt executive or administrative duties. 

The President’s directive to Secretary Perez is to amend the overtime regulations to:

  • Update existing protections in keeping with the intention of the FLSA;
  • Address the changing nature of the American workplace; and
  • Simplify the overtime rules to make them easier for both workers and businesses to understand and apply. 

When the Department of Labor issues its proposed rule changes in the coming months, we will let you know the details of what may change.  Because the rulemaking process will take some time, any changes in overtime pay will likely take effect in late 2014 or in 2015.  Stay tuned.

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