Proposed Changes to Overtime Regulations Don’t Update Wage Laws Sufficiently

In his State of the Union speech on January 28, 2014, President Obama promised to use his regulatory authority and executive orders to bypass Congress when they could not reach a deal. He has begun to follow through aggressively on this promise in the labor arena.

• On February 5, the National Labor Relations Board reissued proposed regulations to restructure union elections that will shorten campaigns, bring faster elections and reduce employer rights to appeal decisions.
• On February 12, the President issued an executive order raising the minimum wage on federal contractors.
• On March 6, the Equal Employment Opportunity Commission published new guidelines that expand Title VII’s prohibitions against religious discrimination, stating that employers must accommodate employees’ requests not to comply with dress and grooming policies that contradict their religious practices, unless the employer can show undue hardship.
• And on March 13, President Obama issued another executive order directing the Department of Labor to expand the number of people who can receive overtime pay under the Fair Labor Standards Act (FLSA).

This call for new regulations to cut back on the FLSA exemptions from overtime is the subject of this post.

In general, the FLSA requires overtime pay for workers who work more than 40 hours/week, unless they fit into one of several categories of employees who are “exempt” from FLSA requirements. The largest exempt categories are for executive, administrative, and professional employees.

In his March 13 memorandum, President Obama stated:

. . . regulations regarding exemptions from the Act’s overtime requirement, particularly for executive, administrative, and professional employees (often referred to as “white collar” exemptions) have not kept up with our modern economy. Because these regulations are outdated, millions of Americans lack the protections of overtime and even the right to the minimum wage.

Therefore, I hereby direct you [DOL] to propose revisions to modernize and streamline the existing overtime regulations. In doing so, you shall consider how the regulations could be revised to update existing protections consistent with the intent of the Act; address the changing nature of the workplace; and simplify the regulations to make them easier for both workers and businesses to understand and apply.

Labor experts expect that the Department of Labor will increase the salary threshold for these exempt workers from $455/week to somewhere in the neighborhood of $970/week.

I’m not adverse to an increase in the salary threshold. The current threshold of $455/week has been quite low, equating to $24,000/year, and was last increased ten years ago.

However, I have two concerns about changing the FLSA regulations—the first that it won’t improve workers’ wages as the President said, and the second that it doesn’t get at the heart of the problems with the FLSA.

1.  Businesses will change their hiring practices in response

An increase in the salary threshold of the anticipated magnitude will greatly expand the number of workers eligible to receive overtime pay. But businesses will not stand still in response.

Rather than increase the overtime wages they have to pay, many businesses are likely to change the way they structure jobs. They may pay their supervisory workers overtime and hire fewer non-supervisory workers to offset the overtime paid to the supervisors. They may hire more workers, but work them fewer hours to avoid the extra cost of overtime. They may cut back everyone’s hours to keep labor costs the same. Businesses are not likely to let an increase in overtime pay increase their cost structures increase without any response.

As one commentator stated,

“Employers should begin to consider, however, how increases to the required salary level and revisions to the duties tests under the “white collar” exemptions may impact long-standing staffing and compensation models for a wide range of employees.”

These changes may or may not be good for the economy. But if President Obama thinks more workers will automatically get “the protections of overtime” with an increase in the salary threshold, he is wrong. Some workers may find their pay cut when their hours are reduced.

2.      FLSA is out of date in many respects

My second concern is that we are missing a big opportunity to improve our wage laws overall. The FLSA was adopted in 1938 in response to the Great Depression. The labor market has changed substantially in the last 76 years, and many aspects of the FLSA regulations do not fit today’s labor market.

One issue that many employers and employees alike have requested is additional flexibility on the definition of “work week” and the ability to offer “compensatory time off” in lieu of overtime wages. For example, defining a two week period of 80 hours, rather than a single week of 40 hours, and permitting employees and employers to agree to flexible schedules, or occasional fluctuations, across that longer period of time before overtime is payable.

Moreover, we no longer live in a world where most employers do all their work at the employer’s place of business. Many workers do some work from home, or at least answer work-related calls and emails. Policing overtime work is increasingly difficult, and if the new regulations do not address the problems of monitoring employees’ working hours will set employers up to pay for time they never intended employees to work.

Any regulatory change that only addresses the narrow issue of the salary threshold for white collar exemptions is missing a huge opportunity to update one of our nation’s core labor laws.

Many of the broader changes in the FLSA would require statutory change, and the President cannot address these problems unilaterally. But it would be a big step forward if President Obama worked with Congress to bring the FLSA into the 21^st century, offering changes that employers want in addition to increasing overtime and minimum wage levels as Democrats want. Rather than unilateral executive actions, we need a bipartisan approach to updating work rules across the board.

What aspects of the FLSA do you think are out of date?