Labor Department Proposes New Rules: The Importance of Employee Classifications

March 21st, 2019

On March 7, 2019, the Labor Department released a revision of its previously abandoned, 2016 proposed rule changes governing overtime qualification.  Currently planned to take effect January 1, 2020, the changes are expected to add over a million workers to the ranks of those for whom overtime pay will be required.  The proposed changes include increasing the salary threshold at which most salaried workers become exempt from being paid overtime, plus a large increase in the “highly compensated employee” minimum exemption threshold. These potential changes will impact businesses across the spectrum, but the retail and restaurant industries are expected to be the hardest hit by the resulting increases in labor costs.  Any business hoping to manage labor costs amidst the changing landscape will have to adjust its scheduling and management practices.

Currently, any employees with annual salaries below $23,660 ($455 per week) must be paid overtime rates (time-and-a-half) for all hours in excess of 40 per week, irrespective of the nature of their jobs.  Employees earning more may or may not have to be paid overtime, depending on the nature of their jobs (“the duties test”).  If an employee is paid $100,000 or more per year, he or she may even then be entitled to overtime, but the “duties test” standards lessen to the point that overtime applicability is rare.

Those salary levels have been in place for 15 years.  The Labor Department previously sought to raise both figures substantially during the Obama era, but court delays and a change in administrations scuttled that effort for a time.  The fact that the Trump administration is now allowing increases to proceed has caught many by surprise.

Under the newly proposed rules, the lower threshold would be increased by nearly 50%, to $35,308 per year ($679 a week).  The higher figure would rise at nearly the same rate, from $100,000.00 to $147,414.00.  Interestingly, while the increase for the lower threshold is substantially less than the doubling proposed under Obama, the Trump Labor Department’s proposed dividing line for defining “highly compensated employees” is actually higher than what had been proposed in 2016.

While those below the lower figure always get overtime pay, and those above the higher figure get it only rarely, those falling in the middle range face a more exacting “duties test.”  If a mid-range employee falls into one of several exempt categories — Executive, Administrative, Professional, Computer-related professional, outside sales – then overtime need not be paid.  But if a review of an employee’s duties indicates that he or she does not truly fall into any of those categories, that employee is not exempt from the overtime requirement.  Employers must note that the name applied to an employee’s position does not govern; the duties test is determinative.  Attempting to skirt the law through the use of misleading job titles is how many employers end up facing huge liabilities, often many months or even years after the problematic pay periods.

The proposed rule changes do not modify the exemptions categories or the duties test.  But clearly, the large increases in the threshold figures means that every employer needs to determine, on a case-by-case basis, who must be paid overtime and who perhaps need not.  This may require consultation with a business attorney.  Doubts should be resolved in favor of classifying an employee as non-exempt, meaning that employee would be entitled to overtime pay.

These changes are expected to hit retailers and restaurants the hardest, as sales commission and tip income may have to be tracked with greater exactitude than ever if the employer is hoping to avoid overtime liability.

Lest anyone hope that changes as burdensome as these at least might not have to be dealt with again for another 15 years, the proposed rule also includes a commitment to more regular, incremental increases, as opposed to large increases being adopted only sporadically.  That means that employers will have to get in the habit of repeating the review process, possibly every year.