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Labor Department Issues Proposed Update to Overtime Requirements

Last night, the Department of Labor’s (DOL) long-awaited proposed rule on overtime requirements was unveiled. The DOL intentionally wrote the rule to withstand legal challenge, and from the details it appears to be legally sound.

Under the rule, any worker who earns less than $35,000 per year would be automatically eligible for overtime pay. The DOL came to this numerical figure by using the same methodology as the 2004 overtime rule, which set the salary threshold at the 20th percentile of salaried workers in the lowest-wage region (the South) and in the retail industry. There is one slight difference in methodology. In 2004, the DOL used U.S. Census Bureau data on salaried employees from 2002, because it was the most recent available data. This would have set today’s salary threshold at $33,332. However, the DOL chose to use projected 2020 data to set the salary threshold because it anticipates future wage gains. As the DOL explains, the “modest projection is preferable to relying on data that could be a year or two old by the time the final rule becomes effective.”

Using forward-looking data to set the salary threshold may be preferable to the DOL, but this provision of the rule should not be set in stone. If in the process of finalizing the rule the projected data changes and wage gains do not materialize, the DOL should adjust the salary threshold accordingly.

The proposed salary threshold will make about 1 million workers newly overtime eligible, absent any changes by employers. In contrast, the invalidated Obama overtime rule, which set the salary threshold at $47,000, would have made over 4.2 million employees newly non-exempt and overtime eligible.

How many employees become newly overtime eligible is a crucial outcome of the rule. While it is true that the Fair Labor Standards Act (FLSA) grants the Secretary of Labor a wide breadth of authority to define and delimit overtime exemptions under the FLSA, the text of the legislation is clear that workers become overtime exempt based on their job duties, not salary.

Ignoring this text of the FLSA is what got the Obama rule in legal trouble. In 2017, the U.S. District Court for Eastern District of Texas struck down the Obama overtime rule because its increase to the salary threshold was too high. As Judge Mazzant ruled:

This [the Obama overtime rule] is not what Congress intended with the EAP exemption. Congress unambiguously directed the Department to exempt from overtime pay employees who perform “bona fide executive, administrative, or professional capacity” duties. However, the Department creates a Final Rule that makes overtime status depend predominately on a minimum salary level, thereby supplanting an analysis of an employee’s job duties. …

Because the Final Rule would exclude so many employees who perform exempt duties, the Department fails to carry out Congress’s unambiguous intent.

Historically, the salary threshold was developed for a modest purpose of screening-out obviously non-exempt employees, not act as the litmus test for overtime eligibility. Going forward, this is an area to watch. How many employees can become automatically overtime eligible from an increase to the salary threshold without supplanting an analysis of an employee’s job duties? As demonstrated, a salary threshold increase that makes 4.2 million employees newly overtime eligible was too many.

While it is important to analyze what is contained in the overtime rule, in this case, it is as important to examine what was excluded. As I wrote in a statement:

Employers will not have to deal with the administrative nightmare of multiple salary thresholds based on regional cost-of-living differences. In addition, the DOL will not include a provision to automatically increase the salary threshold every few years. The DOL's rejection of including automatic increases in its proposed rule is a prudent decision given that it is legally dubious and an idea that has been dismissed by past administrations.

For more information on why creating multiple salary thresholds based on regional differences is poor policy, see my regulatory comment letter in response to the DOL’s Request for Information on overtime requirements. Also, here is a blog post that goes more in depth on why an automatic adjustment to the overtime salary threshold is legally questionable at best.

Lastly, one of the more concerning aspects of the proposed rule is that the DOL has predetermined that it will more frequently evaluate the salary threshold via the rulemaking process in order to increase the salary threshold. The DOL wrote it “is committing to evaluate more frequently the part 541 earnings thresholds going forward” and will issue a Notice of Proposed Rulemaking every four years to update the salary threshold.

This is a preferred method compared to the Obama rule that contained a provision to automatically adjust the overtime salary threshold upward every three years. At least, by using the rulemaking process, stakeholders will have an opportunity to voice their concerns over the impact of a higher salary threshold. However, the DOL has the tools at its disposal to determine when it is necessary to increase the salary threshold, but it just doesn’t use them.

A little-known provision (Section 204(b)) of the FLSA requires the Secretary of Labor to submit a biennial report to Congress that “studies wage and hour provisions established by the FLSA and present recommendations to prevent curtailment of employment opportunities. Another area of research includes evaluating and appraising the effects of minimum wage and overtime requirements by taking into account increased costs and other relevant factors.”

Unfortunately, it appears that the DOL has long abdicated its duty to produce this report that is required by statute. Instead of committing to frequently update the salary threshold every four years, the DOL should begin to produce this report regularly. As such, this analysis would inform the agency when the salary threshold has eroded and no longer screens-out obviously non-exempt employees.  

Overall, this is solid proposed rule that scrapped many of the toxic elements of the Obama-era overtime regulation. However, the deliberate pace taken by the DOL puts its rule in jeopardy. Promulgating a rule is a lengthy process and the clock is ticking on the Trump administration. It will be worth watching if the DOL can finalize the rule prior to the end of Trump’s tenure.