Obama Proposes Shrinking White-Collar Exemptions for Overtime Pay


NEW YORK—President Obama has proposed expanding the availability of overtime pay, directing the Labor Department to do its first overhaul of Fair Labor Standards Act (FLSA) regulations in 10 years.

The President signed a memorandum on March 13, 2014, instructing the Labor Department to update regulations about who qualifies for overtime pay. In particular, he wants Labor to raise the threshold level for the salary-basis test from the current $455 per week in order to account for inflation. The threshold has been raised just twice in the past 40 years. He would not specify the exact amount the threshold should be raised.

“Unfortunately, today, millions of Americans aren't getting the extra pay they deserve. That's because an exception that was originally meant for high-paid, white-collar employees now covers workers earning as little as $23,660 a year,” Obama said in remarks on overtime pay.

The memorandum also suggests that both the primary duties and pay of some exempted employees do not truly fit in the executive, administrative and professional employees exemptions, referred to as the white-collar exemptions.

In a fact sheet on the president’s memorandum, the White House said, “Millions of salaried workers have been left without the protections of overtime or sometimes even the minimum wage. For example, a convenience store manager or a fast food shift supervisor or an office worker may be expected to work 50 or 60 hours a week or more, making barely enough to keep a family out of poverty, and not receive a dime of overtime pay.” The FLSA's minimum wage would not protect a salaried worker because salaried workers' pay must satisfy the weekly salary-basis test rather than the hourly minimum wage, which is $7.25 per hour.

It also pointed out that “only 12 percent of salaried workers fall below the threshold that would guarantee them overtime and minimum wage protections (compared with 18 percent in 2004 and 65 percent in 1975).” Further, the fact sheet called the FLSA regulations outdated, noting that states such as New York and California have set higher salary thresholds.

In California the threshold is not less than twice the minimum wage for a full-time employee, which is why it’s $640 this year and will rise to $800 in 2016.

California also requires a quantitative test of exempt and nonexempt duties, so if a worker spends 20 hours doing nonexempt activities, the employee can’t be exempt. The FLSA doesn’t have a quantitative test, but some are speculating it might work its way into the Labor Department’s proposed rule.

It is predicted by many business associations that small businesses will be hit particularly hard by a change in the FLSA regulations.

If the regulations shrank the white-collar exemptions, employers would most likely have to either increase workers’ salary above the new salary-basis threshold, to avoid paying overtime, or leave employees in the nonexempt category and pay them overtime. Another option would be for companies to hire more employees, but the other two options most likely offer the most promising alternative.

When asked at a press briefing about the burden on businesses if the Obama administration succeeds in its efforts to both increase the federal minimum wage and revise FLSA regulations, Betsey Stevenson, a member of the White House’s Council of Economic Advisers, said, “We think these two items are very different, but, obviously, they do feed into the same thing, which is people should be rewarded for fair work.” She suggested that some workers in the white-collar exemptions aren’t even earning minimum wage for all the work they do at low salaries.

“The President believes that unless you’re truly in one of these white-collar jobs, that employers should be paying attention to whether they’re actually meeting the duties of paying you the minimum wage and that they should be required to pay you for the hours you work,” she said. “It’s a pretty simple idea: Employers should pay people for the hours they work.”

Even though the President did not assign a number for the minimum salary-basis threshold, Stevenson said the overtime “protections have been eroded over time. This threshold … in 1975 was nearly $1,000 in today’s dollars; today it’s $455.” Stevenson believes that the rule should be modernized as a matter of the “basic principle of fairness.”

Hedley Lawson, Contributing Editor
Managing Partner
Aligned Growth Partners, LLC