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Overtime exemption updates fuel concerns

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The U.S. Department of Labor may issue a final proposal that will change the highly litigated, so-called “white-collar exemptions” for overtime with respect to workers' duties without giving employers the opportunity to comment on the matter.

The Labor Department's wage and hour division last week announced its long-awaited proposal to amend the white-collar overtime exemption for executive, administrative and professional employees under the Fair Labor Standards Act, but focused only on the salary levels required for the exemption, not the job duties.

Employers must pay nonexempt workers one-and-a-half times their regular rate of pay when they work more than 40 hours in a week. Under the proposal, which is expected to take effect next year, the salary level at which employees are exempt from receiving overtime pay would increase to $50,440 a year from the current $23,660.

In addition, the proposal would establish an escalator mechanism for updating the salary and compensation levels in the future.

It has been estimated that about 5 million people will be affected by the proposal. Its origin is a memo sent by President Barack Obama to the Labor Department last year, in which he said rules originally intended to limit overtime for highly paid employees now cover workers “earning as little as $23,000 a year.”

And insurers traditionally have not covered large employers' wage and-hour litigation risks, though that is beginning to change, with some Bermuda insurers having entered the market. In addition, a handful of U.S. insurers offer the coverage to smaller employers, generally those with up to 1,000 employees.

Eligibility for overtime pay is based on salary levels and job duties, with executive, administrative and professional the three primary exempt categories. Under current FLSA rules, for example, an executive exemption is applied to an employee who regularly directs the work of at least two employees.

Employment attorneys say that rather than issuing a firm proposal on changing job duties, the Labor Department is seeking comments only on related issues, including what, if any, changes could be made to the duties tests and whether employees should be required to spend a minimum amount of time performing their primary duty to be exempt.

But observers are concerned the final proposal will include changes in exempt job duties. “It's a less transparent way to go about things than they're doing with the salary level,” said Douglas A. Hass, an associate with law firm Franczek Radelet P.C. in Chicago.

If the intention is to change the duties requirements “employers should be given the opportunity to see what the changes are and comment on them, and it doesn't seem from its notice the DOL plans to do this,” Mr. Hass said.

To comment on the issue, “you have to guess at what the department might be considering,” said Alexander J. Passantino, a partner with law firm Seyfarth Shaw L.L.P. in Washington.

Robert A. Boonin a member of law firm Dykema Gossett P.L.L.C. in Detroit, said the Labor Department may be seeking to reintroduce the so-called “long” test, which was eliminated in 2004, under which no more than 20% of the exempt administrative employee's time — 40% for retail workers — could be spent on nonexempt duties.

It could also be that Labor has taken the approach of seeking comment rather than proposing a rule, because it doesn't “necessarily have a good, quick fix on this issue,” said Shannon D. Farmer, a partner with law firm Ballard Spahr L.L.P. in Philadelphia.

John E. Thompson, a partner with law firm Fisher & Phillips L.L.P. in Atlanta, said he believes if Labor's final regulation does cover job duties, it would be successfully challenged under the Administrative Procedure Act.

The 1946 act governs the process federal agencies use to develop and issue regulations and requires the public be given the opportunity to comment on notices of proposed rulemaking.

Chris Ratajczyk, Lincolnshire, Illinois-based director of operations at Arthur J. Gallagher Co.'s human resources and compensation practice, said that this proposal “takes off the table a lot of the decisions that are based on duties because it's raising that salary level (for nonexempt employees) so much higher,” enabling employers to spend less time on the issue.

Meanwhile, “There's been a tremendous amount of litigation involving employees claiming they're misclassified as exempt, a lot of that driven by class-action lawyers, and not so much by the employees themselves,” said Lisa A. Schreter, Atlanta-based chairman of Littler Mendelson P.C.'s board of directors.

Although it is “going to be a nightmare for American business,” the salary issue itself is “unlikely on its own to contribute to greater litigation,” she said.