On the Legal Front: FLSA Revisions Are Permanently Dead, at Least Temporarily
Chester Hanvey, Berkeley Research Group
Recent developments in the effort to revise federal regulations that define which employees are “exempt” from the Fair Labor Standards Act (FLSA) protection are worth noting for the I-O community. On August 31, 2017, a federal judge in the Eastern District of Texas granted summary judgment to plaintiffs who challenged the legality of the Department of Labor (DOL) final rule to amend the FLSA regulations that define who is exempt. This ruling effectively ends a long-running effort to implement these revisions.
If it seems as though you have been hearing about revisions to the FLSA for years, it’s because you have. The effort to revise the regulations was initiated by President Obama early in 2014. Since that time, revisions to FLSA regulations have been a hot topic within the business and human resources (HR) communities, leading to countless articles and webinars designed to help business navigate the new rules. This topic has also received some attention within the SIOP community. For example, at the 2016 annual conference in Anaheim, I participated in a panel discussion that included SIOP members Cristina Banks, Juan Sanchez, and Nancy Woolever that addressed the implications of proposed FLSA revisions. In the January 2016 issue of TIP, Cristina Banks and I cowrote a column that discussed this issue as well.
Although discussion surrounding FLSA revisions have occurred over a period of several years, all of the discussions are related to a single rule change. The rule-making process includes multiple steps that have occurred over a period of several years, which has been further complicated by litigation over the legality of the rule change. To add clarity, I have included a timeline of the key events in the rule-making process up to this point. First, I’ll provide a very brief overview of the FLSA and the exemptions. At the end of this column, I’ll describe the current status of FLSA exemptions and implications for employees, employers, and I-O psychologists.
FLSA Overview
The FLSA was enacted in 1938 and offers a variety of protections to employees, including minimum wage and maximum hours. The most notable protection is the requirement for employers to pay employees an overtime rate (1.5 times their regularly hourly rate) for all hours worked in excess of 40 in a workweek. Organizations may classify employees as “exempt” from FLSA coverage, provided that they meet several specific criteria which are describe in federal regulations (29 C.F.R. §541). Exempt employees are paid a fixed salary, regardless of the number of hours they work (often called “salaried” employees).
The three most common FLSA exemptions are the Executive, Administrative, and Professional Exemptions, collectively known as the “white collar” or EAP exemptions. Though the specific criteria to qualify for these exemption differ, all exemptions are based on the amount of method of pay (“Salary Test) and the work performed by the employee (“Duties Test”). Legal disputes may arise when an employee challenges their classification as exempt and thus not provided overtime time. I-O psychologists have been successful in applying job analysis methods to provide evidence related to the duties test. Job analysis methods such as observation, self-report questionnaire, and structured interviews are commonly used to evaluate the duties test.
Proposed Revisions
The primary change in the final rule was a substantial increase to the minimum salary for exempt employees: from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). The new minimum was set at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). Therefore, all exempt employees who previously qualified under one of the white collar exemptions and earn less than $47k per year will no longer meet the Salary Test and will become nonexempt. Notably, no changes to the duties test were included in the final rule, despite being discussed by the DOL as a possibility and receiving considerable attention.
Timeline of Events
2014, March President Obama issues a directive to the Secretary of labor to “modernize and streamline” existing FLSA exemption regulations.2
2015, July Notice of Proposed Rulemaking (NPRM) is published, providing a preview of how the DOL intends to modify the FLSA. This also opens a period of public comment on the proposal.3
2015, Sept. Period of public comment closed, during which time approximately 270,000 comments were received.4
2016, May Final Rule published by the DOL with an effective date of December 1, 2016.5
2016, Sept. Lawsuit filed by 21 states challenging the legality of the final rule.6
2016, Nov. Donald Trump elected president along with leadership changes within the DOL.
2016, Nov. In response to lawsuit, a federal judge places a temporary injunction on the final rule days before it was set to go into effect, thus preventing the rule from being implemented.7
2017, July DOL issues a public Request for Information (RFI) to assist the department in preparing a new proposal to revise FLSA regulation.8
2017, August Final rule is permanently blocked by federal judge. This is the outcome of the same lawsuit that resulted in the 2016 temporary injunction9
Evaluating Exempt Status Moving Forward
The August 2017 ruling means that the proposed revisions will never take effect. However, the absence of change is significant and newsworthy. The days and months leading up to the original December 2016 implementation date included substantial concern for business leaders and HR professionals attempting to determine how to effectively comply with the new regulations. In the Notice of Proposed Rulemaking, the DOL estimated that 4.6 million exempt employees (20% or all exempt employees) would not have met the increased salary threshold and would no longer have qualified for an exemption.10 For those who did not meet the new salary threshold, employers would have been required to either increase their salary to the new level or reclassify employees to nonexempt. Both of these options carries some degree of financial burden or legal risk for organizations.
The current exemption criteria for the three white collar exemptions remain in effect, and are summarized in the table below. Readers should refer to the actual regulations11 for more detailed guidance. The DOL has also published Fact Sheets,12 which contain information about exemption in a concise and accessible format.
In addition to federal regulation, exemption status may also be impacted by state labor laws and regulations. When federal and state requirements differ, the more employee-friendly requirement applies. In some states, the threshold for exemption status is significantly higher than federal requirements. In California for example, the salary test and duties test are more restrictive than their federal equivalent.
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Exemption
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Criteria (Must meet all)
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Executive
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(1) Paid a salary of $455 or more per week; and
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(2) Primary duty is management of the enterprise, department, or subdivision; and
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(3) Manages two more employees; and
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(4) Has the authority to hire or fire others (or whose recommendations are given particular weight).
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Administrative
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(1) Paid a salary of $455 or more per week; and
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(2) Primary duty is the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers; and
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(3) Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance
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Professional
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(1) Paid a salary of $455 or more per week; and
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(2) Primary duty meets one of the following criteria:
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i. Primary duty is work requiring advanced knowledge (i.e., “learned professional”); or
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ii. Primary duty is work requiring invention, imagination, originality or talent in an artistic or creative field (i.e., “creative professional”)
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Implications for I-O Psychologists
In blocking the final rule, the judge emphasized the importance of the duties test when evaluating exemption status. He noted that the salary level in the final rule was so high that it essentially rendered the duties test irrelevant (nearly all employees who meet the new salary would also meet the duties test) and is inconsistent with the intent of the FLSA. The ruling emphasized the importance of evaluating employee job duties, which is something I-O psychologists are particular well-qualified to do.
The increased public interest in FLSA exceptions as a result in the rulemaking process may lead to increased demand in evaluating exemption status of employees. Employees with enhanced awareness of exemption criteria may be more likely to challenge their status. Alternatively, employers may be more likely to revisit current classifications to determine compliance. Both present opportunities for I-O psychologists to apply our expertise.
A possible outcome of a classification review is the decision to reclassify employees to nonexempt. This decision has implications for a variety of internal systems that are relevant to I-O psychologists and HR professions including staffing, labor budgets, scheduling, payroll, and timekeeping. In many cases, employee job duties also change as a result of reclassification. To the extent that this occurs, a variety of additional systems are potentially impacted including selection, training, and performance management. Finally, there are unique legal risks associated with nonexempt employees, including off-the-clock work and meal and rest break compliance. These represent a variety of areas in which I-O psychologists can help employers navigate these changes effectively.
What’s Next?
Although the previous FLSA revisions will not take effect, indications are that DOL intends to pursue alternative revisions. As a first step in the new rulemaking process, the DOL issued a Request for Information (RFI) in July to assist the department in preparing a new proposal to revise FLSA regulations. This was issued even before the previous rule was permanently invalidated. The Labor Secretary has stated that he believes the previous salary was too high13 but the department has appealed one part of the ruling that blocked the previous final rule to confirm the agency’s authority to set a salary threshold, something that was called into question by the ruling.14 Therefore, it is expected that the DOL will propose an increase in the salary level but at a level lower than what was previously proposed. It is unknown whether changes to the duties test will also be proposed. Given the history of previous rule making process, this will likely take some time.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.
Notes
1 See Hanvey & Banks (2015) for more detailed description.
2 Executive Office of the President (2014).
3 U.S. Department of Labor (2015).
4 See: U.S. Department of Labor (2017a).
5 U.S. Department of Labor (2016).
6 State of Nevada et al. v. U.S. Department of Labor et al.
7 State of Nevada et al. v. U.S. Department of Labor et al. (2016).
8 U.S. Department of Labor (2017b).
9 State of Nevada et al. v. U.S. Department of Labor et al. (2017).
10 U.S. Department of Labor (2015).
11 29 C.F.R. §541 et seq.
12 U.S. Department of Labor (2008).
13 Campbell (2017a).
14 Campbell (2017b).
References
29 C.F.R. §541 et seq.
Campbell, B (2017a, November 15). House committee presses Acosta on OT, fiduciary rules. Law360. Retrieved from https://www.law360.com/articles/985740/house-committee-presses-acosta-on-ot-fiduciary-rules
Campbell, B (2017b, October 30). DOL to appeal invalidation of white collar overtime rule. Law360. Retrieved from https://www.law360.com/articles/979597/dol-to-appeal-invalidation-of-white-collar-overtime-rule
Executive Office of the President (2014). Updating and modernizing overtime regulations: Memorandum for the Secretary of Labor (79 FR 15209). Retrieved from https://federalregister.gov/a/2014-06138
Hanvey, C.M., & Banks, C.G. (2015). Wage and hour litigation. In C.M. Hanvey and K. Sady (Eds.), Practitioner’s guide to legal issues in organizations (p. 283-320). New York, NY: Springer.
State of Nevada et al. v. U.S. Department of Labor et al., No. 4:16-cv-00731, (E.D. Tex. 2016). Retrieved from: http://www.txed.uscourts.gov/sites/default/files/notable/Memorandum%20Opinion%20and%20Order%20.pdf
State of Nevada et al. v. U.S. Department of Labor et al., No. 4:16-cv-00731, (E.D. Tex. 2017). Retrieved from: http://www.txed.uscourts.gov/sites/default/files/notable/Memorandum%20Opinion%20and%20Order%20%20Dated%208-31-2017.pdf
U.S. Department of Labor. (2008). Fact Sheet #17A: exemption for executive, administrative, professional, computer & outside sales employees under the Fair Labor Standards Act (FLSA). Retrieved from: https://www.dol.gov/whd/overtime/fs17a_overview.pdf
U.S. Department of Labor. (2016). Defining and delimiting the exemptions for executive, administrative, professional, outside sales and computer employees (81 FR 32391). [Final Rule]. Retrieved from https://federalregister.gov/a/2014-06138
U.S. Department of Labor. (2015). Defining and delimiting the exemptions for the executive, administrative, professional, outside sales and computer employees [Notice of Proposed Rulemaking]. Retrieved from: https://www.gpo.gov/fdsys/pkg/FR-2015-07-06/pdf/2015-15464.pdf#page=2
U.S. Department of Labor. (2017a). Final rule: Overtime. Retrieved from: https://www.dol.gov/whd/overtime/final2016/
U.S. Department of Labor. (2017b). Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees (82 FR 34616). [Request for Information]. Retrieved from https://www.federalregister.gov/documents/2017/07/26/2017-15666/request-for-information-defining-and-delimiting-the-exemptions-for-executive-administrative
