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Paul Zimmerman
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FLSA’s Proposed New Rules Regarding Overtime Exemptions

Article originally appeared in HALA Newsletter

The U.S. Department of Labor has proposed changes to the Fair Labor Standards Act’s (“FLSA”) overtime exemptions, and President Obama recently announced plans that will extend overtime under the FLSA for salaried “white collar” employees who earn an annual salary less than $55,440. These regulations, if finalized, will likely have a major impact on hotels.

Currently, most employees covered by the FLSA must be paid at least one and one-half times their regular rate of pay for all hours worked beyond 40 hours in any given workweek. Thus, unless properly classified as “exempt,” any employee that is required—or otherwise permitted—to work overtime must receive premium pay for hours worked.

The FLSA includes “white collar” exemptions that exclude certain executive, administrative, and professional employees from the federal minimum wage and overtime requirements. Certain computer professionals and outside sales employees may also qualify as exempt under slightly different threshold requirements.

As it stands now, in order to qualify for “white collar” exemption, an employee must:

  • Be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“the salary basis test”);
  • Be paid at least a specific salary threshold, which is $455 per week (the equivalent of $23,660 annually for a full-year employee) in existing regulations (“the salary level test”); AND
  • Primarily perform executive, administrative, or professional duties, as provided in the U.S. Department of Labor's regulations (“the duties test”).

An employee’s job title is not determinative of his or her exempt status, and an employee being paid on a salary basis does not alone provide sufficient ground to classify an employee as exempt. For a “white collar” exemption to apply, an employee’s specific job duties, in addition to the employee’s salary, must meet all of the applicable requirements provided in the Department’s regulations.

The Department also proposes to automatically update the standard salary and compensation levels annually, either by maintaining the levels at a fixed percentile of earnings or by updating the amounts based on changes in the CPI-U.

  • The Notice of Proposed Rulemaking was published on July 6, 2015 in the Federal Register, and interested parties were invited to submit written comments and feedback on the proposed rule until September 4, 2015.
  • The proposed rule, if adopted, will have a significant impact in certain sectors such as the retail and hospitality industries where salaries tend to be relatively lower than in other sectors.
  • According to Randy Pullen, president and CEO of WageWatch, approximately 250,000 hotel employees may be affected. Impacted employees may include Assistant General Manager, Director of Sales, or other similar positions that qualify as exempt under the “duties test” and are paid a salary of less than $55,440 per year.  

Takeaways for hospitality businesses:

  • These are proposed rules. The public had 60 days to comment and the Department may modify them after reviewing those comments.  Any final rule will not likely become effective until next year or later.  Christine Owens, director of the National Employment Law Project, has said that the rule could be adopted by the end of year for implementation in January 2016.
  • Hospitality employers that anticipate being significantly impacted by these changes may want to consider assessing whether exempt-classified positions might need to be reclassified, assessing both salary levels under the proposed new salary test and job duties under the duties test. Reclassification will require a thoughtful and effective rollout plan that takes into consideration the automatic annual update under the proposed new FLSA regulations, seeks to maximize guest experience, and is aligned with the employer’s long-term business strategy.
  • Regardless of the outcome of the proposed rule, employers must remain aware of the wage and hour laws of the state(s) in which they operate. Some states, including California, have laws that already make more employees eligible for overtime than the existing FLSA regulations.