Assessing OT policies in anticipation of FLSA overhaul

In-house counsel and management-side employment attorneys should prepare their clients now for upcoming revisions to the Federal Labor Standards Act, which could take effect by the end of next year and result in mandatory overtime payments to millions of salaried employees presently excluded from FLSA protection.

The FLSA requires that employers pay a premium rate of 1.5 times their employees’ regular hourly rate for all hours worked over 40, except in the case of certain classes of workers specifically enumerated within the act.

The vast majority of exempt employees fall into the three “white-collar” categories of executive, administrative and professional employees who receive a salary of more than $455 a week. State overtime exemptions closely mirror the FLSA.

A weekly salary of $455, however, amounts to an annual pay of only $23,660 — a figure that isn’t likely to make blue-collar, hourly wage-earners in even the most economically downtrodden parts of the country think twice about changing professions.

In March, President Obama issued a memorandum to the Department of Labor directing it to update and streamline DOL regulations so as to make more salaried employees eligible for overtime under federal law.

Experts predict that at least one of two major changes to the white-collar exemptions will be made.

First, it is almost certain that the minimum salary threshold for overtime exemption will be significantly raised from $455 a week; the last time that DOL overtime regulations were revised, in 2004, the figure nearly doubled from $250 a week.

Raising the weekly salary threshold will immediately bring millions of white-collar workers under FLSA protection, requiring premium overtime pay for all hours worked over 40.

More workers eligible for overtime also means that wage and hour litigation, which has increased every year since 2006, will continue to rise.

Second, the DOL may adopt a strict “division of labor” test, requiring employers to prove that their salaried employees have spent at least 50 percent of their working hours performing “executive, administrative or professional duties” in order to qualify them under one of the white-collar overtime exemptions.

For example, if an assistant store manager at a large clothing retailer is entrusted with hiring, firing, promoting and evaluating store employees, but spends only 10 hours of a 45-hour work week performing those functions — with customer service responsibilities taking up the majority of her remaining time — then the retailer would not be able to claim an FLSA executive employee exemption for the assistant store manager.

Presently, the determination of an employee as exempt or non-exempt under the FLSA is made on a case-by-case basis according to the “primary duty” test, which looks beyond time spent performing any specific function, but analyzes all relevant factors pertaining to the employee’s background, qualifications and terms of employment.

Employers can effectively manage these anticipated changes in one of several ways.

First, for white-collar employees who (1) earn an annual salary within striking distance of the new exemption limit and (2) work a set number of overtime hours each week, the easiest solution may be to give these employees a raise above the new exemption limit.

For example, if the weekly salary threshold were raised to $800 (or approximately $41,600, an office manager who makes $37,000 a year and is required to work 50 hours a week would be entitled to approximately $7,500 of overtime. Simply raising the employee’s salary to $41,600 would once again bring the office manager within the FLSA administrative exemption, eliminating the need for any overtime pay.

Next, employers can avoid requiring a specified number of weekly hours altogether, and may instead adopt a “fluctuating workweek policy,” whereby the employee agrees that his weekly salary is received as compensation for any and all hours worked each week, which may be well over 40. Overtime pay is then due at a rate of only one-half the employee’s regular hourly rate, instead of one and a half.

Not only does a fluctuating workweek prevent claims that an employee has not been paid “anything” for hours worked over the required minimum, but it also reduces the “regular hourly rate” at which overtime will be paid.

For example, let’s assume that the office manager in the scenario earns a weekly salary of $800, but that the salary is still well below the new FLSA overtime threshold, entitling the office manager to overtime pay. The office manager’s “regular hourly rate” for computing overtime will be $16 every week ($800 divided by 50 hours a week). Her overtime rate will be $24, and she will make $1,040 each week ($800 base salary a week, plus $240 for 10 overtime hours each week). Working 100 hours, she’ll make $2,080 in two weeks.

Now consider the same office manager, who is paid an $800 weekly salary under a “fluctuating workweek” policy, and who works 42 hours one week, and 58 the next. The first week, her “regular hourly rate” is $19.04 ($800 divided by 42); her premium overtime rate will be $9.52, and her total pay will be $819.04 ($800 weekly salary plus $19.04 of overtime). The second week, however, her “regular hourly rate” will be $13.79 ($800 divided by 58). Her premium overtime rate will be $6.90, and her total pay will be $924.20 ($800 weekly salary plus $124.20 of overtime). Working the same 100 hours, she’ll make $1,743.24 in two weeks.

As you can see, the fluctuating workweek policy saves the employer approximately $336.76 every two-week period, and prevents the office manager from alleging that she has been deprived of pay when and if she is required to work more than 50 hours a week.

As for the details regarding regulatory changes, at least one former member of the Department of Labor has stated that the new regulations could be drafted and presented for approval as early as fall 2015. How long until the regulations become effective will be another story.

Ryan P. Avery is an associate at The Law Office of Peter M. Mirageas in Milford, Massachusetts, where he handles labor and employment disputes on behalf of both individual and corporate clients.