Department of Labor s New Overtime Exemptions Rules

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1 Department of Labor s New Overtime Exemptions Rules Explaining the Obama Administration s Overtime Expansion Proposal April 5, 2016 Producer: Christine Yan Director: Afzal Bari

2 KEY DEFINITIONS Employees Satisfying Certain Duties Tests May Be Exempt From Overtime Pay Key Definitions for Understanding Overtime Exemptions EAP Employee Salaried employees making less than $100,000 annually whose duties meet guidelines set by the Department of Labor which classifies their role as Executive, Administrative, or Professional. HCE Employee Highly Compensated Employees are classified as such if their annual compensation is $100,000 or greater. Salaried EAP or HCE employees s may be exempt from overtime pay under the Fair Labor Standards Act if their salary falls above a certain threshold and if they satisfy one of the Executive, Administrative, Professional, and HCE duties tests In June, the Obama administration s Department of Labor proposed raising the overtime exemption threshold to $970 (weekly compensation) for EAP employees and $122,148 (annual compensation) for HCE employees An increase in the thresholds would make fewer employees exempt from premium overtime pay Executive Duties Test Administrative Duties Test Professional Duties Test HCE Duties Test All of the following must be satisfied: Primary duty is managing the enterprise or subdivision of the enterprise Regularly direct at least two fulltime employees Have authority or significant influence in hiring decisions All of the following must be satisfied: Primary duty is office or nonmanual work related to management or general business operations Primary duty requires use of discretion and independent judgment All of the following must be satisfied: Primary duty is intellectual in character and requires advanced knowledge in a field of science or learning Advanced knowledge is acquired by a prolonged course of specialized intellectual instruction Employee must regularly perform at least one of the duties of an EAP employee Source: US Department of Labor Wage and Hour Division, Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act. 2

3 THRESHOLDS FOR OVERTIME EXEMPTION Obama Administration s Overtime Expansion Proposal Doubles Salary Threshold for EAP Exemption Who Is Exempt from Overtime Pay Under DOL Regulations Type of Worker Current Threshold and Status 2016 Proposed Threshold Change Hourly Nonexempt Nonexempt No changes Salaried: HCE $100,000 per year or more Exempt Less than $100,000 per year Nonexempt $122,148 per year or more Exempt Less than $122,148 per year Nonexempt 22% increase in threshold Salaried: EAP $23,660 per year or more Exempt Less than $23,660 per year Nonexempt $50,440 per year or more Exempt Less than $50,440 per year Nonexempt 113% increase in threshold Salaried: Neither Nonexempt Nonexempt No changes Under DOL regulations, all workers are entitled to premium overtime pay for each hour worked above 40 hours a week until found to be exempt; President Obama s proposal doubles the annual salary threshold for EAP employees exemption from $23,660 to $50,440 and increases the annual salary threshold for HCE employees exemption from $100,000 to $122,148 The proposal also advocates automatically adjusting exemption thresholds in the future such that the threshold for EAP workers is set as the 40th percentile of full-time salaries, and for HCE workers as the 90th percentile of full-time salaries Source: Department of Labor, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, July 6,

4 HISTORICAL SALARY THRESHOLD FOR EXEMPTION Weekly Salary Threshold for EAP Overtime Exemption Has Eroded Over Time Due to Inflation Historical Weekly Salary Threshold for EAP Exemption Adjusted for Inflation 2015 dollars Nominal dollars $1,400 $1,200 Proposed 2016 Threshold $1,000 $800 $600 $400 $200 $ The weekly salary threshold for the EAP exemption has been updated 7 times since its inception in 1938; however, it s only been updated once since 1975, and not enough to bring the threshold up to previous levels after accounting for inflation Inflation essentially repeals regulations, making it necessary to continuously adjust the salary threshold Historical real values of the threshold have also aimed for the proposed 2016 level ($970) as the cutoff for exemptions. Past increases have either brought the threshold up to this level (pre-1960) or occurred when the decline hit this level (highlighted portion of graph) Source: National Journal Research 2016; Ben Gitis, Primer: Overtime Pay Regulation, American Action Forum, November 20, 2014; Bureau of Labor Statistics. 4

5 ESTIMATES OF EMPLOYEES AFFECTED The Department of Labor Estimates 1.2 Million Employees Would See Wage Increase From New Regulations Number of Currently Exempt Employees Who Would Gain Overtime Benefits EAP Employees HCE Employees 4.6 mil employees newly eligible 21% 4% 988,000 employees regularly work overtime 180,000 employees sometimes work overtime 36,200 employees newly eligible 40% 3% 14,500 employees regularly work overtime 1,000 employees sometimes work overtime Assuming no response from employers (i.e. reclassifying employees), around 4.7 million HCE and EAP employees would become newly entitled to overtime pay, but the Department of Labor has found that only 1.2 million of these employees work overtime and would see their pay increased due to the rule change Labor Secretary Thomas Perez estimates that in total, employee compensation would increase by $1.3 billion a year However, these numbers are unrealistic, as employers responses to the regulation changes would likely affect employees eligibility Source: Department of Labor, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, July 6, 2015, Christine Mai-Duc, Obama s New overtime Rules: How They d Work and Who They d Affect, Los Angeles Times, June 30,

6 ESTIMATES OF IMPACT Estimates of Overtime Pay Proposal s Impact Vary Different Estimates Of Employee Benefits and Employer Costs Resulting From Overtime Changes Number of Workers Who Benefit Department of Labor: 4.7 million 4,682,000 Economic Policy Institute: 13.5 million 13,500,000 American Action Forum: more than 2.6 million (excludes employees who don t work overtime) 2,600,000 Goldman Sachs: 120,000 (new hires for jobs created from reduced hours) 120,000 Administrative Costs for Employers (first year) Department of Labor: $593 million National Retail Federation: $745 million (for retail and restaurant industries alone) $592,700,000 $745,000,000 There is no data source for the number of EAP overtime pay-exempt employees; estimates for the number of workers who would be affected by the new rules greatly differ depending on the methodology used Economic Policy Institute s estimate of the number of workers who directly benefit from the changes is much higher than the Department of Labor s estimate because EPI includes an estimate of 8.1 million workers who would have their overtime protections strengthened due to the increased threshold Source: Department of Labor, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, July 6, 2015, National Retail Federation, Rethinking Overtime, Ben Gitis, Primer: Overtime Pay Regulation, American Action Forum, November 20, 2014, Ross Eisenbrey and Lawrence Mishel, The New Overtime Salary Threshold Would Directly benefit 13.5 Million Workers, Economic Policy Institute, August 3,

7 POSSIBLE EMPLOYER ACTIONS AND UNINTENDED CONSEQUENCES Employers May Respond to New Overtime Regulations With Cost-Cutting Measures Possible Actions Employers May Take and How Employees Would be Affected 1. RECLASSIFY SALARIED WORKERS AS HOURLY WORKERS Guaranteed overtime pay, but average hourly wage may be lowered in order to keep total weekly compensation constant, and benefits may be reduced to offset employer administrative costs Less flexibility, unlikely to be able to work remotely due to hour-tracking requirements Fewer opportunities for advancement 2. REDUCE HOURS TO AVOID OVERTIME PREMIUMS Limited to 40-hour workweek (unrealistic for many businesses, especially in Washington, and for Congressional staffers) Less flexibility, unlikely to be able to work remotely due to hour-tracking requirements Reduced bonus/benefits/base wages to offset employer costs 3. INCREASE SALARY OF EMPLOYEES NEAR THRESHOLD Employees with salaries slightly below the threshold may have their salaries increased to keep them exempt from overtime pay Bonus/benefits may be reduced to offset the salary increase Source: Corey Stern, Goldman Sachs thinks new overtime pay rules could increase total employment but do nothing for wage growth, Business Insider, July 7,

8 SUPPORTERS AND CRITICS OF OVERTIME RULES Critics of Overtime Expansion Proposal Point to Unintended Consequences for Both Employees and Employers Support and Criticism of Obama Administration s Overtime Proposal Supporters Employers will cut hours in response to the higher threshold, but this will add jobs as overtime hours are spread around. - UC Berkeley s Center for Labor Research The proposal will reverse decades of wage decline. - National Employment Law Project The changes will provide a necessary boost to the economy, but this is just a first step. - AFL-CIO In the end, most employees will likely come out ahead due to the overtime premium even if base wages decline. - Brookings Critics Regulations hurt small businesses and employees will lose hours, benefits, advancement opportunities, and work flexibility. - U.S. Chamber of Commerce Overtime expansion will lead to lower base wages, loss of work flexibility, and reclassification of salaried workers to hourly workers. - Heritage Foundation Most employees won t see a change in net income, and administrative expenses alone (updating payroll systems, creating hour tracking methods) would cost restaurant and retail industries $745 million. - NRF Oxford Economics Study Very few people will benefit from the rules, and research suggests that the changes will lead to part-time work replacing full-time work. - American Action Forum Source: Tanya Basu, What to Know About Obama s Overtime Pay Announcement, TIME, June 30, 2015, Ben Gitis, Primer: Overtime Pay Regulation, American Action Forum, November 20, 2014, James Sherk, Salaried Overtime Requirements: Employers Will Offset Them with Lower Pay, Heritage Foundation, July 2, 2015, National Retail Federation, Rethinking Overtime, U.S. Chamber of Commerce, U.S. Chamber Statement on Obama Administration s Overtime Proposal, June 30, 2015, Christine Mai-Duc, Obama s New overtime Rules: How They d Work and Who They d Affect, Los Angeles Times, June 30, 2015, AFL-CIO, President Richard Trumka Applauds Overtime Expansion Proposal, June 30, 2015, Harry J. Holzer, Overtime Pay Will Boost America s Wages, Brookings, July 2,

9 TIMELINE OF KEY EVENTS Release Date of Finalized Rules is Unknown, But Rules Expected to be Effective in 2016 Timeline of Events Relating to Obama s Overtime Proposal March 2014 Presidential Memorandum to Department of Labor President Obama signed a Presidential Memorandum directing the Department of Labor to update overtime regulations. June 2015 July 2015 March 2016 July - late 2016 Announcement of New Overtime Rules President Obama published an op-ed in the Huffington Post outlining the new overtime pay rules. Comment Period on Overtime Proposal Begins The Federal Register accepted written comments on the proposed overtime rules between July 6 and September 4, 2015 and received around 270,000 comments during this period. Bill Introduced in Congress to Block Overtime Rules The Protecting Workplace Advancement and Opportunity Act would require the Department of Labor to conduct a full economic study of the impact of the rule on the business committee, and would block a proposal that would limit opportunities for employees and place significant burdens on job creators; the bill has yet to reach the floor. Final Rules Published After All Comments Are Reviewed The timing of the release of the finalized overtime rules is unknown; but the administration intends for the rule to come into effect in The rules will come into effect between within days after it is released. Source: Tim Devaney, GOP bill seeks to roll back Obama overtime rule, The Hill, march 17, 2016; Martha C. White, Rule expanding overtime pay eligibility won t be finalized this year, NBC News, November 12, 2015; Alex Brown, Will the Obama Administration s New Overtime Rule Upend Washington? National Journal, April 3,