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Last June 30th the Department of Labor (DOL) released proposed rules updating federal overtime pay regulations under the Fair Labor Standards Act (FLSA). The FLSA was first enacted in 1938 and established the first-ever national minimum wage (then, 25 cents per hour), a standard 44 hour work week (since reduced to 40), and time and a half overtime pay for hours worked past the standard work week.
These rules stood for many years, without seeing any significant updates for decades. In particular, the rules dealing with exempt employees, those defined as highly compensated employees not eligible for overtime, had not kept up with the times. Under the old rules the definition of “highly compensated” was set at a threshold of an annual income of $23,660. That old and outdated low salary threshold will increase by more than double, to $50,440 under the new rules, and will be indexed to reflect future salary growth.
The other component of exempt determination is a duties test; that has not been addressed with these changes, although it’s under review. Exemptions are determined based on job duties performed and compensation received in each specific position; job titles alone don’t determine the exempt or nonexempt status of any employee. The job categories eligible for exemption are currently the same; the executive, creative professional, computer employee and outside sales exemptions are still fairly straightforward, although the administrative exemption remains one of the classification categories most open to interpretation and misclassification.
So what does that mean? With definitions in the duties test not yet changed, your focus should be on looking at compensation levels, which are intended to remove many employees currently classified as exempt from eligibility for that designation. DOL estimates that 62% of full-time salaried workers were eligible for overtime pay in 1975 under the rules then in force, but today only 8% of those same kinds of workers are eligible because of the old, low salary threshold that had not kept up with inflation and wage growth. With these changes they estimate overtime protection will extend to some 5 million additional employees. You’re going to want to determine if any of them are yours.
As a final note, remember we’ve mentioned in the past that wage and hour employment liability claims, most often filed as class actions, are at or near the top of the list of all types of employment practices liability claims filed each year, and are forecast to reach record levels in 2015. Insurance companies writing EPL insurance want no part of them and such policies almost always exclude them; where some coverage is available, it covers defense costs only, with sublimits generally in the $100,000 to $500,000 range, max. In most cases you cannot turn to an insurance policy to cover the potential high cost (even when you win the case) of a wage and hour lawsuit.
Prevention is the key. These new rules should be the trigger for another look at your job classifications and controls.