President Obama's Direction To Revise Overtime Regulations May Ultimately Have Little Real Impact

by Michael Kun

Much has been made of President Obama’s March 13, 2014 presidential memorandum directing the Secretary of Labor to update the Fair Labor Standards Act (“FLSA”) regulations to expand overtime protection to more employees.  At this time, it is only speculation about what the resulting changes will be.  But some of that speculation leads to the conclusion that the changes may ultimately have little impact for most employers and most employees.

One of the articulated goals in the presidential memorandum  is to simplify overtime rules to make them easier for both employers and employees to understand.  Given how complicated the analysis of various overtime exemptions can be, both employers and employees alike should agree that such a general goal is an admirable one.  Whether they will both agree that the simplifications themselves are fair seems unlikely, particularly if those simplifications restrict the exemptions such that employees who currently fall within one or more overtime exemption will no longer do so.

Of course, only time will tell how the Secretary of Labor proposes amending the regulations.  That said, early speculation is that the relatively low weekly compensation threshold that is a criterion of most of the overtime exemptions – requiring that the individual be paid at least $455 per week – will be increased.   

But if that is the only change, one has to ask if it will have any meaningful practical impact.

While many years ago it may have been the case that many exempt employees were being paid $455 per week, that would not appear to be the case any longer.  Presumably, few persons treated as exempt are paid $455 per week – and many are paid four or five times that, if not more.

For the sake of argument, let’s assume that the only change to the regulations is to increase the weekly threshold to $700.

Employees who are paid at $700 or more per week would not be affected. 

But how about those who are paid less than $700 per week? 

An employer could simply raise that employee’s weekly salary to $700. 

But what about the employer who does not want to pay that employee $700 per week – or who cannot afford to do so?  What if that employer can only afford to pay that employee $600 per week?

The answer is simple: the employer could merely convert the employee from a salaried, exempt position to an hourly, non-exempt position, and then reverse engineer his hourly rate such that he makes $600 per week.  If the employee is expected to work 60 hours in a week and the employer can only afford to pay him $600, the employer would simply assign the employee an hourly rate of $8.57 per hour.  (The employee would be paid 40 hours at that hourly rate, and 20 hours at time-and-a-half of that rate, equaling $600.) 

The only real impact would be in those situations where the amount an employer wishes to a pay an employee currently treated as exempt would translate to an hourly rate below the minimum wage, which would then require the employer to increase the hourly rate to pay the employee the minimum wage. 

How often would that be the case?

Probably, not often.

So, if the only change to the regulations is to increase the weekly compensation threshold, the change truly will have little impact. 

And if there are more sweeping changes, such as changes to the duties that would qualify for the exemption, that, too would appear to have little realistic impact.  Any employees who no longer qualified for an exemption would merely be transitioned to hourly, non-exempt positions, with their compensation reverse engineered so that they would be earning the same amount each week as they were earning as exempt employees.