A recent Presidential memorandum and a recent U.S. Supreme Court decision are likely to make a big difference in whether employers have to pay overtime to some managerial, administrative, or professional employees.
Punch 1: On March 3, 2014, President Barack Obama directed the Secretary of Labor to revise regulations that determine who qualifies for overtime protection.
Punch 2: On March 9, 2015, the U.S. Supreme Court issued its opinion in Perez v. Mortgage Bankers Association. This opinion affirms an “interpretive rule” by the U.S. Department of Labor (DOL) that said mortgage-loan officers are entitled to overtime.
So let’s explore this issue a bit—by (1) providing some basic information about the Fair Labor Standards Act (FLSA), (2) explaining the rationale for the Presidential memorandum, and (3) addressing the effect of the Supreme Court decision.
Passed in 1938, the FLSA does four things:
- It establishes a minimum wage (now $7.25 an hour).
- It establishes the 40-hour work week, by requiring employers to pay overtime (time and a half) for any hours over 40 that an employee may work during a 7-day period.
- It exempts certain people from this law, those who are who are employed as outside sales representatives or in executive, administrative, or professional positions. (Exempt workers are typically referred to as white-collar or salaried employees.)
- It allows the DOL to set a threshold for the exemption. More about this later.
Thus, under the FLSA, employees may be classified as exempt (they don’t have to be paid overtime) and non-exempt (they do have to be paid overtime). As an aside, let us observe that determining whether or not an employee is exempt is a very complicated process, which we’ll talk about in a bit more detail later in this post.
Rationale for Presidential Memorandum to Revise Overtime Regulations
Although the FLSA permits the DOL set the threshold at which even white-collar employees are entitled to overtime, that threshold has been updated only twice in the past 40 years. In 1975, a white-collar employee who made less than $250 a week had to be paid overtime. In 2004, that threshold was set at $455 a week.
So what does this mean for the manager of a fast-food (FFM) restaurant who has to work 60 hours a week to make sure the restaurant operates properly? The following table shows what happens when the FFM is paid $1 above and below the $455-a-week threshold.
(paid $454 a week)
(paid $456 a week)
|Must be paid overtime?||Yes||No|
|Gross pay for 40 hours||$454||$456|
|Hourly rate for 40 hours||$11.35 an hour||$11.40 an hour|
|Gross pay for 60 hours||$794.60||$456|
|Effective hourly rate
(gross pay ÷ 60 hours)
|$13.25 an hour||$7.60 an hour|
In short, the exempt FFM effectively makes only 35¢ more per hour than the minimum wage. In some cases, this means that an exempt FFM (with more responsibility than a line employee) may have a lower gross wage per week than a non-exempt employee who gets paid $7.60 an hour and works 15 hours of overtime. The line employee who’s paid at $7.60 an hour and works 15 hours of over time would be paid $475 for the week ($304 + $11.40 × 15) compared to the exempt FFM who would be paid $456 for his or her 60-hour week.
Today, only 12% of salaried workers fall below the threshold that would guarantee them overtime and minimum wage protections, compared to 18 percent in 2004 and 65% in 1975. So that’s the reason President Obama has directed the DOL to update the overtime regulations.
Supreme Court Decision
The case of Perez v. Mortgage Bankers Association demonstrates how challenging it can be for an employer—or an employer’s lawyers—to determine whether an employee should be paid overtime. And understanding that challenge requires a bit of background about the Administrative Procedure Act (APA).
Acting pursuant to its authority under the FLSA, the Wage and Hour Division (WHD) of the DOL issues rules as provided by the APA by following this process:
- The WHD publishes a general notice of a proposed rule in the Federal Register.
- The public is given the opportunity to make comments and provide information about the proposed rule.
- The WHD responds to the public comments.
- The WHD issues the final rule and must include a general statement about the rule’s basis and purpose.
These steps are known as the notice-and-comment process, and rules adopted according to this process are referred to as legislative rules because they have the force of law.
But the APA also allows the WHD to issue interpretive rules, general statements of policy or guidance about how to apply the legislative rules. Interpretive rules don’t have the force of law, but advise the public of the WHD’s approach to applying federal law and the legislative rules it’s issued.
Understanding that basic background, let’s take a look at the complex time line of Perez v. Mortgage Bankers Association.
1999: The WHD issued an opinion letter indicating that mortgage-loan officers were exempt (didn’t have to be paid overtime). This letter is considered an interpretive rule.
2001: The WHD issued a letter similar to the one issued in 1999.
2004: The WHD issued a new legislative rule that said financial services employees whose primary function was selling financial products were non-exempt employees (had to be paid overtime). The Mortgage Bankers Association (MBA) requested a new opinion letter about whether mortgage-loan officers were exempt.
2006: The WHD issued an opinion letter indicating that mortgage-loan officers were exempt (didn’t have to be paid overtime) under the new regulation.
2010: The WHD issued a new opinion letter reversing its 2006 decision and saying that mortgage-loan officers were not exempt (did have to be paid overtime) under the 2004 regulation.
Both the 2006 letter and the 2010 letters were interpretive rules, not following the APA’s notice-and-comment process.
2010: The MBA filed suit in the U.S. District Court for the District of Columbia, attacking the 2010 letter. Three mortgage-loan officers intervened in the case.
2012: The district court agreed with the 2010 letter, affirming that mortgage-loan officers did have to be paid overtime.
2013: The U.S. Circuit Court of Appeals for the D.C. Circuit reversed the district court’s decision applying the precedent of Paralyzed Veterans of American v. D. C. Arena, 117 F. 3d 579 (1997). In that case, the circuit court found that the notice-and-comment process applied to changes made to previously issued interpretative rules, in addition to previously issued legislative rules.
2014: The U.S. Supreme Court reversed the circuit court’s decision and affirmed the district court’s decision. So the bottom line is that mortgage-loan officers now have be paid overtime. This was a nine-to-zero decision for the result, but with three justices indicating a different rationale and warning that the WHD’s interpretations may not be given a presumption of correctness previously given.
What does this mean for employers?
- Determining whether an employee is exempt can be a challenging and time-consuming process, requiring a lawyer to examine the FLSA, the DOL regulations, and WHD opinion letters and other interpretive rules and guidance.
- Whether an employer has to pay overtime to an employee can change over time—just as this case indicates. In 2006, mortgage-loan officers didn’t have to be paid overtime; 4 years later, they did.
- Getting an opinion letter from the WHD may often be a wise thing to do—especially in cases where previous guidance is not absolutely clear about a job classification or occupation. In this case, the MBA had a legitimate concern about whether mortgage-loan officers were primarily sales representatives or were professionals who had to make a “professional judgment” about whether a borrower should be given a loan.
- The way has been cleared for the DOL to make the changes the Presidential memorandum directed. In its decision, the U.S. Supreme Court affirmed that the APA sets the maximum procedural requirements Congress was willing to allow the courts impose on the WHD’s decisions (including both legislative and interpretative rules).
All this means that more “managerial” and other previously exempt employees may have to be paid overtime in the future.
Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.