Parsing The Impact Of White Collar FLSA Exemption Proposal

Federal and state labor laws limit which employees can legally be paid a salary independent of hours worked. The Fair Labor Standards Act (FLSA) is the Federal law requiring that certain workers receive overtime compensation, at 1.5 times their regular rate of pay, for all hours of work above 40 each week. Economic theory explains that although the FLSA influences which workers can be paid salaries, it is expected to have little impact on how much workers covered by the FLSA earn each year. The Obama Administration in 2015 and 2016, and the Congressional Progressive Caucus (CPC) earlier this year, proposed important changes to the FLSA that would greatly increase the number of Executive, Administrative, and Professional (EAP) employees covered by the overtime provisions of the FLSA. The Biden Administration has indicated that it intends to revise the overtime regulations and expand the FLSA coverage of EAP employees in a proposed rule that will be released in October.[1] These revisions are important because FLSA (wage and hour) filings substantially outnumber other Federal employment-related class action filings.[2] A large increase in EAP employees covered by the FLSA overtime requirements will cause more growth in wage and hour litigation in Federal courts.

Currently, white-collar employees are exempt from the FLSA overtime requirements if they engage in EAP job duties and earn at least $684 per week (the current minimum salary threshold). Employees who earn at least $107,432 in annual compensation ($2,066 per week) are exempt from the FLSA overtime requirements regardless of their job duties because they are considered “highly compensated” employees. The changes proposed by the Obama Administration in 2015 and 2016, and the Congressional Progressive Caucus (CPC) earlier this year, would cause the FLSA minimum salary threshold to increase rapidly over time until it gets close to the “highly compensated” maximum salary threshold. This would effectively eliminate the EAP duties test and transform the way in which FLSA exempt status is determined. The CPC proposal will mean that eventually, only “highly compensated” employees can be exempt from the FLSA and legally be paid a salary, independent of hours worked.

No government survey indicates how many employees are covered by the FLSA overtime requirements. The Obama administration proposed rule relied on estimates from a Bureau of Labor Statistics monthly survey reporting the number of workers who indicated they are “paid by the hour.”[3] Similarly, the CPC proposes “indexing” the FLSA minimum salary threshold to the 55th percentile of the weekly salary distribution among the sample of respondents to this survey who indicated they are not paid by the hour and worked full time. However, “indexing” the minimum salary threshold to the 55th percentile of an ever-changing sample of workers not paid by the hour will cause the minimum salary threshold to perpetually increase. With each increase in the minimum salary threshold employees earning salaries below the new threshold will be converted to hourly compensation as they are required to receive overtime premiums. Every time employees earning less than the 55th percentile of the salaried distribution convert to hourly rates of pay, the pay distribution among salaried workers shifts to the right and further increases the 55th percentile. This process will continue until eventually only “highly compensated” employees earning above the maximum salary threshold will be exempt from the FLSA. In other words, the changes proposed by the CPC would make the EAP duties test moot for determining FLSA exempt status. The CPC proposal will eventually cause the “highly compensated” employee salary threshold to be the only relevant factor for determining which employees are covered by the FLSA and which employees can legally be paid a salary independent of hours worked.

Economic theory explains that employee compensation is determined by worker productivity and supply and demand conditions, and not whether an employee is paid by the hour or the week. According to this theory, increases in the salary threshold will have little, if any, impact on average compensation for employees who earn well above the minimum wage.[4] Consider, for example, a salaried employee who earns $1040 per week and typically works 48 hours per week. Economic theory suggests that, if an employer were to convert this worker to an hourly position, the hourly wage rate would be $20 so that in a typical week the employee would earn $800 (at $20 per hour) for the first 40 hours of work and $240 (at $30 per hour) for the final eight hours. Thus, in a typical week, the employee is expected to earn $1040, whether paid a salary or paid by the hour. The only substantive impact of the re-classification of this salaried employee to an hourly rate of pay is the employee’s pay will fluctuate from week to week as overtime hours vary.

The CPC proposal or other proposals to “index” the FLSA minimum salary threshold to a specific percentile of the pay distribution among salaried employees will: (1) cause a continual increase in the minimum salary threshold until it approaches the “highly compensated” employee salary threshold, (2) substantially increase the number of workers covered by the FLSA, (3) increase the costs of complying with the FLSA and increase FLSA litigation costs, (4) have little impact on the annual compensation of workers directly impacted by these changes, and (5) increase the week-to-week pay variability of workers re-classified from salaried to hourly positions.

[1] https://www.law360.com/employment-authority/wage-hour/articles/1504874/dol-plans-to-unveil-overtime-rule-in-october?nl_pk=f7b6c328-50d3-4641-8504-8f01ae8b47ec&utm_source=newsletter&utm_medium=email&utm_campaign=employment-authority/wage-hour&utm_content=2022-06-23

[2] According to Seyfarth’s 2022 Workplace Class Action Litigation Report (https://www.workplaceclassaction.com/wp-content/uploads/sites/214/2022/01/WCAR-2022-Ch.-1-2-Final.pdf) there were over 33,000 FLSA collective action litigation filings in Federal courts far outpacing other types of employment-related class action filings.

[3] This proxy is imperfect because, for example, in the 2020 monthly surveys 20.1% of financial managers, 16.5% of architects and 7.5% of attorneys reported being paid by the hour but that does not mean that all of these employees are non-exempt from the FLSA.

[4] Stephen J. Trejo, “The Effects of Overtime Pay Regulation on Worker Compensation,” The American Economic Review, Vol. 91, No. 4, September 1991, pp. 719-740.