Overtime Exemptions

February 18, 2004
No. 9

Background: On March 31, 2003, the Department of Labor (DOL) issued proposed revisions to its rules for determining whether or not an employee qualified as an executive, administrative, or professional employee, and was therefore exempted from the Fair Labor Standards Act overtime rules and other requirements. The current rules for these “white-collar” exemptions are considered to be outdated, and confusion over their application has led to large lawsuits against employers.

Status: The time for public comment has closed. Organized labor has opposed the new rules, and attempts have been made in Congress to forestall changes. To this point these attempts have been unsuccessful. DOL is expected to release final rules in the Spring.

Discussion: The Fair Labor Standards Act, originally passed in 1938, establishes forty hours as the standard workweek and provides employees with “time-and-a-half” pay for hours worked over the standard forty. The FLSA provides for exemptions, and just who qualifies as a “white-collar” employee is a critical question for both employers and employees. But many of the current rules that determine who qualifies date back to the 1940s and are in need of an update.

Salary levels that employees must receive in order to be considered executives, administrators, or professionals, have not been updated since 1975. Depending on job duties, an employee may be considered exempt while earning as little as $250 per week.

The current rules also attempt to evaluate the nature of the work being performed, but in practice this part of the rules has proved to be very difficult to apply. Finally, the current rules do not account for the rise of highly skilled and highly compensated production workers.

Confusion over application of the exemptions has lead to private legal judgments as high as $90 million against employers who have misinterpreted the rules, not always in bad faith.

The new rules will increase the minimum salary an employer will need to pay before a worker can be considered “exempt” from $250 to $425 a week. At the same time, the rules will be streamlined, making it easier for workers, employers, and investigators to determine whether or not an employee should be eligible for overtime pay.

Clarifying and updating the rules will also allow private employers to make more common-sense decisions regarding which employees will and will not be eligible for overtime, lessening the risk of private lawsuits based on FLSA. Finally, by increasing minimum salaries required for exemptions to apply, the proposed regulations will guarantee that low-wage workers receive overtime, bringing enforcement more in line with the intent of the act.

Action item: While there is some room for technical changes, such as adjusting the minimum salary to account for local cost of living, the proposed rules should be adopted.

This brief was prepared by Heritage Visiting Fellow Paul Kersey.

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Economic Policy Institute testimony to the Senate Committee on Appropriations

International Federation of Professional and Technical Engineers letter to the Wage & Hour Division Administrator of DOL

Analysis & Research

Heritage Foundation analysis
"Overdue on Overtime"

Heritage Foundation analysis
”Modernizing the Fair Labor Standards Act for the 21st Century”

GAO Report "Fair Labor Standards Act: White Collar Exemptions in the Modern Workplace"

U.S. Chamber of Commerce analysis
"Clarifying Proposed Changes to the Overtime Regulations Governing 'White Collar' Employees"

HR Policy Association analysis
"The Facts About Proposed Policy Changes To The FLSA White Collar Regulations"

HR Policy Association analysis
"Reform of the 1950s Rules on Who Is Exempt From Overtime Must Continue to Move Forward"

Human Resource Management Association of Southeastern Wisconsin, Inc. analysis
"How Do The DOL's Proposed Regulations On 'White Collar' Exemptions Impact You?"

Commentary

Edwin J. Feulner, The Heritage Foundation, op-ed "Laboring for Overtime"

James V. DeLong, Competitive Enterprise Institute, magazine article
"Old Law vs. The New Economy: How New Deal-era Regulations Stifle Flexible Work Arrangements"

Dawn Dayton, American Society of Employers, op-ed "Fair Labor Standards Act Unfair?"

HR Magazine, magazine article
"DOL issues proposal for changing FLSA overtime exemption requirements"

Winstead Labor & Employment, magazine article "DOL Issues Proposed Regulations Overhauling White Collar Exemptions to Overtime Pay Laws"

James Bovard, Cato Institute, magazine article "How Fair Are the Fair Labor Standards?"