Employers are dusting off payroll spreadsheets from 2016 in response to the Department of Labor’s release last week of a revised rule on how to figure out who has to be paid overtime.
Even if digital spreadsheets don’t get dusty, they have been sitting on some virtual shelf since 2016, when a federal judge spiked the Obama version of the rule, saying that it illegally expanded the scope of the wage and hour law it purported to implement.
The re-released rule in question governs the so-called white collar exemptions to the overtime requirement of the federal Fair Labor Standards Act. That New Deal law was enacted in 1938, but it is very much alive and kicking, as evidenced by the thousands upon thousands of lawsuits filed annually—especially in Florida. (The Southern District of Florida in some years has led the nation in numbers of FLSA suits filed.)
“Exempt” employees don’t have to be paid overtime if they work more than 40 hours a week. The complicated rule on who is and is not exempt spawns a large fraction of FLSA lawsuits; it hasn’t been changed since 2004. A change in the rule is, therefore, a big deal.
The rule has two parts. First, the employee has to be paid a salary of at least a certain amount, and not be paid by the hour. Second, the employee’s primary duty has to fit one of the definitions in the rule. If both parts are satisfied, no overtime.
Back in 2004, the minimum salary was set at $455 a week. Obama tried to more than double that to $913, along with other liberalizations. That amount would have been periodically and automatically increased. The intended result would have been to make millions upon millions of employees newly eligible for overtime. The rule never went into effect. A federal judge said that the minimum salary level was so high and narrowed the exemption so much that the rule effectively rewrote the law it supposedly implemented.
The salary level in the rewritten version lands in the middle between the existing level and the Obama proposal, at $679 a week. However, it allows employers to count bonuses and commissions as up to 10 percent of pay, which was not allowed before. It also leaves unchanged the “duties” test, which the struck-down rule had undermined.
So what about those spreadsheets? Assuming this version of the rule becomes final (it’s currently in a public comment period—the department has projected it could become final by 2020), then upwards of one million employees would become overtime eligible overnight. Employers who want to avoid the possibility of an overtime obligation may do so simply by raising their salaries to the minimum level.
Does that make financial sense? Here’s an example:
The current minimum $455 a week translates to $11.38 an hour for 40 hours. It would take 13.1 hours of overtime pay to reach $679, the proposed minimum. So, if the holder of the $455-a-week salaried job averages at least 13 hours of overtime a week, it’s a wash to raise him to $679 just to avoid overtime. That’s a lot of overtime.
But it’s not that simple, of course. The cost of benefits is sometimes linked to pay levels. Believe it or not, some people take pride in being salaried and don’t want to think of themselves as hourly workers. Employers can nudge a salaried employee over the line with commissions or an end-of-the-year bonus. All of this further assumes that the job passes the duties leg of the exemption test.
The math is simple, but the larger calculation of whether to do it is not. Given that the increase in the minimum salary under this proposed rule is half of that previously proposed, it seems likely that a larger fraction of the affected employees will be under consideration for raises. When it was a question of more than doubling a lot of people’s pay, the answer was foregone in many cases: Make them hourly. But raising someone by $50, $75 or even $100 a week is a different question.
Paying the salary minimum without having to calculate overtime and, more importantly, being able to have someone work late without thinking much of it could be an acceptable trade-off for many employers.
All they’ll have to worry about is meeting that duties test—and continuing to live in the FLSA lawsuit capital of the country.
David C. Miller is a shareholder in the Miami offices of Bryant Miller Olive. He is board-certified in labor and employment law by The Florida Bar and has represented management exclusively in South Florida for more than 20 years. His email address is firstname.lastname@example.org.