Business owners should prepare to pay for more overtime as the Department of Labor readies a proposed rule on overtime thresholds.
Alan Crone, founder and CEO of The Crone Law firm, said the battle over what levels overtime wages should kick in has been a subject of debate and litigation for decades — but it’s nearly certain to go up.
“Having some sort of adjustment to the salary provision, particularly with the recent inflation we have seen, makes a lot of sense,” Crone said. “I tell employers [to] assume that it is going up.”
The issue is the Fair Labor Standards Act, which establishes a pay threshold under which employees are eligible for overtime pay at time-and-one-half their normal pay when they work more than 40 hours a week.
In 2020, the Labor Department raised that threshold from $23,600 a year to $35,568 per year, or about $684 per week. That pay threshold was a step back from the originally proposed $47,893 threshold.
Earlier this year, the Labor Department set May 2023 as the target for a new proposed rule that would likely once again raise that threshold, after having pushed back the proposed rule from 2022. Once that proposed rule is officially published, there will be a public comment period where companies and people can weigh in before they issue a final rule.
It’s unclear what the Labor Department will do regarding exemptions to overtime pay, which is a multipart test involving the employee’s duties and overall pay.
Crone said the overtime rule is just the latest in a decades-long effort to tighten up wage and overtime rules, both by having the Labor Department work more closely with the Department of Justice and the IRS on potential violations, but also with attempts to adjust or amend the Fair Labor Standards Act — efforts that have often fallen apart under the complexity of the law.
“The FLSA was a depression-era statute to help the economy and increase the amount of people in the workforce. When it was written, they expected people to punch clocks at a factory. It’s not designed for the workforce of the [1960s] — much less the workforce of 2023,” Crone said.
Crone said companies should proactively take a look at their workers to ensure not only that they are paying overtime when they should, but also that workers are properly categorized as exempt or non-exempt from overtime by looking at their duties.
He noted one misclassified employee is one thing, but business owners that misclassify workers across a series of franchises or locations could end up seeing class-action lawsuits or other legal problems.
“It depends on your risk tolerance. If you don’t mind a lot of risk and you don’t mind sleeping at night with the idea that employees doing a collective action against you,” Crone said.
He noted the case law is vague because most people want to settle litigation rather than take it through the court system.
“One of the most expensive things is being right. It takes a lot of effort to prove you are right in court. That’s a business decision,” he said.
The Labor Department has also been aggressive in issuing violations to companies, which is common under Democratic administrations, Crone said. The Supreme Court also recently found an oil rig employee was owed overtime despite their relatively high pay because they did not meet all the standards for being exempt from overtime pay.
Meanwhile, a lawsuit in federal district court is challenging whether the Labor Department has the right to apply a salary requirement to workers exempt from overtime at all.
Mark Kluger, a partner at law firm Kluger Heally LLC, said the workforce economy does not need another drastic shock to the system.
“With the number of significant reductions in force mounting, requiring employers to start paying overtime to mid-level management that is currently exempt and salaried will just result in more turmoil and offshoring of our workforce,” Kluger said.
The potential for a new rule is just the latest in a series of proposed and finalized rules at federal agencies that have transformed the employee-employer relationship. That includes the Federal Trade Commission’s proposed rule largely banning non-compete and non-solicitation agreements, as well as another Labor Department rule seeking to limit who can be classified as independent contractors.
Meanwhile the National Labor Relations Board is cracking down on the confidentiality and nondisparagement agreements that have long been standard in severance agreements. We have already written some tips on how employers could tweak their severance agreements.