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A recent presidential decree presents future implications for employers and for recruiters who place contractors.

President Obama has issued a memorandum directing the Department of Labor (DOL) to update the regulations surrounding who can legally be considered exempt from overtime. The end goal is to make fewer people ineligible for overtime.

The Fair Labor Standards Act (FLSA) requires that most American workers be paid at a rate 1.5 times their regular pay rate for any hours worked over 40 in a workweek. Some employees who work in executive, administrative, and professional positions can be considered exempt from overtime.  They must meet the “minimum salary” and “duties” tests, as defined by the DOL, to qualify for these “white collar exemptions.”

In his memorandum to Secretary of Labor Tom Perez, who oversees the DOL, President Obama stated that the white collar exemptions “have not kept up with our modern economy. Because these regulations are outdated, millions of Americans lack the protections of overtime and even the right to minimum wage.” Therefore, he asked the DOL to:

  1. “Modernize and streamline” the FLSA overtime rules to make them more consistent with the original intent of the FLSA
  2. Address the changes in the modern workforce
  3. Make them easier for both employers and workers to understand

While it is too soon to tell what the exact changes will be, it is certain they will include an increase to the minimum salary requirement.  A Fact Sheet released by the White House states that this minimum has failed to keep up with inflation, only having been changed twice in 40 years. The minimum salary requirement to qualify as exempt is currently $455 per week, which is below the poverty level for a worker supporting a family of four.  It can even cause someone to be paid under minimum wage if they had to work 65 or more hours per week and were only paid the minimum salary required by the white collar exemptions.  The Fact Sheet also points out that, due to that salary threshold, only 12% of Americans qualify for overtime, compared with 65% in 1975. As a result, experts predict the salary threshold could be increased to as high as $1,000 per week.

The “duties test” will also likely be updated.  Each exemption has its own standards for what constitutes an exempt employee based on the duties they perform. For example, to qualify for the Executive Exemption, the worker’s primary duty must be managing the enterprise or a department or subdivision, and they must regularly direct the work of at least two other full-time employees. It is expected that those duties tests will become more specific, possibly dictating an exact percent of time a worker must spend doing certain duties to qualify.

This is an important issue for employers and for recruiters, even if you outsource the employment of your contractors to a back-office service. Here are the main action items for recruiters:

  1. Keep up-to-date on the issue. The changes will not happen overnight.  It took two years for the DOL to decide on changes for the last revision in 2004. However, you will want to keep this issue on your radar so that when the regulations are updated, you will be ready.
  2. Communicate with clients. If you have exempt contractors placed at any of your client companies, you will want to make your clients aware of this. When the changes come, you may need to increase some contractors’ salaries or move them to non-exempt.  Both scenarios have the potential to increase your clients’ costs.  They will probably appreciate the heads up because they will have to apply the new regulations to their direct staff as well.
  3. Make sure you are following current federal AND state laws. If you have contractors currently classified as exempt, you of course want to make sure they qualify under the DOL’s current regulations. But it’s not just the DOL you have to worry about.  Some states, such as California and New York, have different rules. For instance, in California, the salary of an exempt worker can be no less than twice the minimum wage for a full-time employee.  The minimum is currently $640 but will increase to $800 in 2016.

The DOL is expected to release proposed regulations as early as this summer, so we should have a better picture then of what they will look like once they are updated. We will be sure to keep you posted as this issue continues to develop.

This article is for informational purposes only and should not be considered legal advice.

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