Legal Blog

Howard Kurman Explains What Business Owners Need to Know About the President’s New Overtime Pay Rule

President Obama recently stunned employers when he announced a new overtime pay rule. The President’s proposal, which would go into effect in 2016, raises the salary cap for mandatory overtime to $50,400 per year—more than double the current threshold. That means millions of American workers considered exempt today will soon eligible to receive overtime pay. Besides its immediate impact on employees’ paychecks, Obama’s overtime proposal could lead to broad changes in the workplace. Changes like what, exactly? Howard Kurman co founder of Offit Kurman Attorneys At Law and a Labor Employment attorney at the firm sat down with Jeff Salkin, host of Maryland Public Television’s Your Money & Business, to explain how the proposal might affect bosses and workers alike. Mr. Kurman also provides employers with Labor and Employment law updates bi-weekly on his Labor and Employment Telebriefs®.   JEFF SALKIN: Who is eligible today for overtime? HOWARD KURMAN: Under the rules that were most recently amended in 2004, employees that are classified as exempt—either professionals, or administrative, or executive employees who are on a salary basis—that is, they make right now at least $455 per week, and who also have to meet certain duties tests—would be classified as exempt, meaning that they will not be paid overtime if they work more than 40 hours, the theory being that there are many employees who may work 20 hours in a particular week but still will be paid the $455. There are two classifications of employees: exempt, basically on a salary; and non-exempt, those employees who are paid on an hourly basis. What has the Obama administration proposed to do? The Obama administration—and it’s gotten a lot of publicity obviously lately—has proposed to increase the salary by almost two times the amount. Under the proposed regulations, which have been published in the federal register, the new salary test, rather than being almost $24,000–$25,000 a year, will be $50,000 a year, so it’s almost twice as much. In order to be classified as an exempt employee, a business therefore would have to pay an employee—either an executive employee or administrative employee or professional employee—almost $50,000 per year on a salary basis, meaning the same pre-determined amount on a weekly basis or a bi-weekly basis—however the company works. What happens next? Does Congress have a say or this is just administrative? Congress really doesn’t have a say. The Department of Labor has promulgated these regulations. They publish them in the federal register, and all parties—employers, employees, labor unions alike—have the right to submit comments to the Department of Labor. The Department of Labor may get comments from many segments of the workplace community—whether it’s labor unions, employers, trade associations—they will submit comments, and based on those comments the Department of Labor will finalize its rules and publish them probably sometime in 2016. Taking effect 90 days after some period. Well, yes. The final rule will be issued and then there will be a grace period, after which the rules will go into effect for all companies. So, something is likely to change next year. It hasn’t been finalized, but let’s walk through a scenario. If they stick to the initial proposal—say there’s somebody making $30,000 a year and who’s not currently getting overtime, do they automatically start getting overtime? What would happen is, if they set the salary level at $50,000, and the person who was making $30,000 now works more than 40 hours, that person would not meet the salary test promulgated by the Department of Labor, and therefore would be entitled to be paid time-and-a-half for all hours that that person worked over 40. From a standpoint of being proactive, most employers between now and 2016 should take a good look at their workforce, see who they have classified as exempt employees, and make a determination as to whether they truly are exempt or not, and whether they’ll eventually meet the salary test that’s established by the Department of Labor. How black-and-white is the test for whether somebody is ‘exempt?’ You said you’re supposed to have some management or administrative responsibility, but it’s easy to give somebody a title that implies that maybe they have more authority than they really do. That’s a good question, and oftentimes it’s not a black-and-white answer. Let’s take the executive exemption. The test for that is somebody who regularly uses independent judgment and discretion in managing the business, or managing a part of the business, and in doing that, supervises, or hires and fires employees—more than two employees. So, you could have somebody, theoretically, who is called a manager or called a supervisor, and makes the established salary, but doesn’t exercise the degree of independent judgment and discretion and supervision that’s required by the Department of Labor to call somebody an exempt manager or executive. Same thing for an administrative employee. An administrative employee is somebody who regularly exercises judgment and discretion in implementing company policies, not just simply somebody who’s routinely implementing a policy, but somebody who makes decisions that can bind the company. So, you’re correct. Oftentimes you can run into grey areas, and that’s why from the Department of Labor standpoint, there are really two requirements to be exempt: one is you have to be paid the salary, and the other is you have to meet the duties tests that are established under the Department of Labor rules. Did you say that 40 hours a week is the cutoff? Is there an eight-hour workday component of that, or it doesn’t matter? No, it doesn’t matter. Unlike some states, for instance California—employees who are non-exempt in California and who work more than eight hours in a day would be paid overtime, irrespective of whether they worked 40 hours in a week—in Maryland, and in many other states, in order to be eligible for overtime, you have to work more than 40 hours in a particular week. What’s the interaction between state and federal law on this? Is there anything in state law that supersedes or grants additional rights to employees beyond what the feds are talking about? Howard Kurman: Actually, the Department of Labor rules and regulations stipulate that if a state has a more generous statute of regulation that would add more protection to an employee than that which is provided under federal law, then the state law would govern. The state law in Maryland, in terms of its Wage and Hour Act, is very similar to the Federal Act. So, there are not been many differences [here], but in other states there are. How often do individuals bring complaints like, ‘I’m just making donuts or whatever I’m doing—I’m not actually exercising any administrative, any executive authority, and I ought to be able to collect overtime?’ It happens quite frequently. One of the burgeoning areas of litigation in employment law are those claims that are brought by employees who are claiming that they have been misclassified; that rather than being an exempt employee, as their employer calls them, they are really not exempt, and that therefore they have worked more than 40 hours a week for some long period of time and are entitled to be paid time-and-a-half for all the hours that they haven’t been paid. Jeff Salkin: From an employee standpoint, how do you win one of those? And from an employer standpoint, how do you defend against it and make sure everything is on the up-and-up? Howard Kurman: Let’s start with the employer. From the employer standpoint, the employer needs to have very scrupulous and clean employment records and time records. If you have a time clock for instance, or some other means of timekeeping, hopefully the employer will be able to demonstrate the precise hours that are worked by an employee. So, if an employee claims that they have worked more than 40 hours in a particular week, but the employer has records that would rebut that, the employer has a good chance of defeating it. On the other hand, there are many times and many occasions where employees have their own records, the employer does not have a clean system of timekeeping, and in that situation, the presumption is that if the employee claims that he or she has worked those hours and the employer cannot rebut it by some precise record, then the Department of Labor is going to prefer and credit the records of the employee. Jeff Salkin: What happens in the modern world where everybody has a smartphone and either you’re expected to be checking the company email over the weekend or you do it because that’s what you do? How is that viewed from a labor law, wage, and hour standpoint? Howard Kurman: Well, again, the distinction that’s drawn is between the exempt and the nonexempt employee. If an employee is exempt, it doesn’t matter how many hours the person is spending on a smartphone—you’re going to get the same predetermined salary on a weekly or biweekly basis. On the other hand, if you’re a nonexempt employee—an hourly employee—and you’re spending time checking emails and writing emails, and checking things on your network at home, that could be deemed to be work time. It is an area of litigation today where nonexempt employees are claiming that they should be compensated for time spent on checking emails or writing emails, or even answering phone calls by a supervisor at home. Jeff Salkin: Would it be legal, in advance of the Labor Department’s new rule kicking in next year, for a company to actually cut somebody’s pay, so that with overtime they would be making the same amount of money? Say there’s somebody who’s actually working 50 hours a week—they’re not getting overtime, they’re getting x dollars—and you cut the base rate pay on the overtime, so they’re going to come out the same or maybe slightly ahead: Would that be allowed? Howard Kurman: It is allowed. There’s no prohibition that says that once an employee is paid a stipulated salary that the salary can’t be changed at some point by the employer. The only prohibition, obviously—or the only inhibition—is whether or not from a competitive standpoint you’re going to lose employees. But, from a legal standpoint, the employer is certainly free to do that as long as he gives notice to the employee that he is changing the salary in enough time for the employee to get adequate notification of the change coming. Jeff Salkin: In a few seconds, what are you advising your clients to do at this point? Howard Kurman: I’m advising my employer clients to take a good look at their job descriptions; make sure, if they’re classifying employees as exempt, that they truly meet the duties tests that are established by the Department of Labor; and if they’re paying people much less than $30,000, $35,000, or $40,000, to take a deep look at whether or not they need to change those salaries in the future. Because even if the Department of Labor rules don’t indicate that it’s $50,000, it’s going to be a lot more than the present $25,000, and employers need to take a good look at that. Howard Kurman with Offit Kurman, thank you for being with us. Thank you very much. My pleasure.

ABOUT HOWARD KURMAN

Howard Kurman website Howard K. Kurman is Chair of the firm’s Labor & Employment Department. Mr. Kurman regularly counsels clients on all aspects of proactive employment/labor issues. He represents employers ranging in size from as small as 20 employees to those employers with geographically disparate locations consisting of over 4,000 employees. Mr. Kurman assures, through regular contact with his clients, that they promulgate and maintain the most effective employment policies that will, to the extent possible, minimize their legal exposure in today’s litigious workplace. You can also connect with Offit Kurman via FacebookTwitterGoogle+YouTube, and LinkedIn. WASHINGTON | BALTIMORE | FREDERICK | PHILADELPHIA | WILMINGTON | VIRGINIA | NEW YORK