What the DOL’s Overtime Pay Proposal Could Mean for Employers

A new rule proposed by President Biden and released by the U.S. Dept. of Labor (DOL) in August would result in an estimated 3.6 million additional workers qualifying for overtime pay — even though they're salaried employees. But the proposal faces a stiff challenge in the current politically charged environment. This article looks at the issues involved and what it could mean for employers.

What the FLSA Says

The Fair Labor Standards Act (FLSA) is the controlling federal law on overtime pay. It says that eligible employees must be paid time-and-a-half their regular pay rate for overtime hours above 40 hours a week unless an exemption applies. Exemptions apply to certain executive, administrative and professional (EAP) employees, as well as outside salespeople.

For example, take the fictional Samantha, an employee who normally earns $30 an hour, with no exemptions applying. If Samantha works 50 hours in a week (or 10 hours over the usual limit), she would be entitled to be paid $45 an hour for those 10 extra hours. So, $450 would be added to Samantha's usual weekly earnings (not taking into account taxes).

Note: State laws may vary from federal mandates. Talk to your professional advisors about your state's rules.

Two Groups

In terms of overtime pay, the FLSA assigns employees to one of two groups:

• ‍Exempt. These employees aren't subject to overtime pay rules. The group generally includes workers paid an annual salary on a predetermined basis, although other rules may come into play.‍
• Nonexempt. This group is paid on an hourly basis and must be paid the minimum wage per hour. Typically, nonexempt employees are entitled to overtime pay when they work more than 40 hours per week.

If employers fail to observe these guidelines, it could trigger penalties going as far back as an employee's hire date.

Three Tests

The DOL, which is responsible for enforcing the FLSA, requires three tests to be met for employees to be treated as exempt, and thus ineligible for overtime pay:

1. ‍Salary basis. The employee must be paid a predetermined and fixed salary that isn't subject to reduction due to variations in the quality or quantity of work performed.‍
2. Salary level. The amount of salary paid must meet a minimum specified amount. This amount, which has been raised several times in the past, currently is $684 per week, the equivalent of $35,568 annually.‍
3. Duties. The employee's job duties must primarily involve executive, administrative or professional (EAP) duties as defined by the DOL's regulations.

In addition, the DOL regulations include a relaxed duties test for certain highly compensated employees. "Computer professionals" are also exempted from the overtime pay regulations.

The DOL investigates noncompliant employers and can find them liable for back wages to employees, plus "liquidated damages" on the back wages. Damages could end up being more than double the overtime pay amount that was due in the first place. What's more, the DOL can impose fines of up to $10,000 and pursue criminal prosecution. Failure to comply with the overtime pay rules could further result in lawsuits from current or past employees.

New Proposal

The new proposal is basically an edited version of an Obama administration proposal that ultimately was dismissed in court. In this version, employers would be required to pay overtime to salaried EAP employees who earn less than $1,059 a week, or $55,068 a year working full time. That's up significantly from the current $35,568.

This proposal is expected to extend overtime pay eligibility to approximately:

• 600,000 health and social service workers,
• 300,000 retail workers,
• 300,000 manufacturing workers, and
• 180,000 hospitality and recreation workers.

According to the DOL, 27% of salaried employees would be entitled to overtime pay because they earn less than the $55,068 threshold.

A smaller group would become eligible for overtime pay by raising the threshold for workers who don't have EAP duties. The Biden administration's proposal would boost the salary threshold for these employees from $107,432 to $143,988. The DOL pointed out that this salary threshold increase addresses one of the criticisms that arose when the Obama-era proposal failed.

Supporters and Critics

These proposed labor law changes have brought both supporters and critics out in force. However, it appears that this latest proposal has a better chance of going into effect than previous attempts. Contact your advisors for the latest information.