Overtime Exemptions in the Fair Labor Standards Act for Executive, Administrative, and Professional Employees

Summary

The Fair Labor Standards Act (FLSA) is the primary federal statute providing labor standards for most, but not all, private and public sector employees. The FLSA standards require that “non-exempt” employees working excess hours in a workweek receive pay at the rate of one-and-a-half times their regular rate for hours worked over 40 hours. The requirements in the FLSA for overtime pay beyond this threshold refer to the “maximum hours,” but the FLSA does not actually limit the number of hours that may be worked. Instead, it establishes standards for the pay required for hours beyond 40 hours in a workweek. The FLSA also provides several exemptions to the maximum hours requirement, some of the largest of which are the EAP (executive, administrative, and professional employees, or “white collar”) exemptions. In effect, these exempt employers from overtime pay requirements for certain employees. The FLSA authorizes the U.S. Department of Labor (DOL) to “define and delimit” the EAP exemptions, rather than setting the specific parameters of the exemptions in the law itself. Since defining and delimiting the EAP exemptions upon the enactment of the FLSA in 1938, DOL has adjusted their parameters eight additional times, most recently in a 2016 rule. In August 2017, a U.S. District Court invalidated the 2016 rule and DOL has subsequently indicated that it is in the process of formulating a new proposal on the EAP exemptions.

As will be discussed in detail in the remainder of this report, the major features of DOL’s rulemaking on the EAP exemptions are as follows:

In every rulemaking since 1938, DOL has required that EAP employees meet three tests to qualify for exemption from overtime pay (i.e., when employees are exempt, employers are not required to pay them for work in excess of 40 hours): (1) exempt employees must perform certain EAP duties (“duties” test), (2) exempt employees must be salaried (“salary basis” test), and (3) exempt employees must earn a salary in excess of the level set by DOL (“salary level” test).

From 1949 to 2004, DOL used a “long” duties test paired with a relatively lower salary level along with a “short” duties test paired with a relatively higher salary level to determine exemption for EAP employees. The main difference between the long and short duties tests was a quantitative limit in the long test on the amount of time an EAP employee could spend performing nonexempt work (no more than 20% in a workweek). During this 55-year period of using long and short tests, the salary level for the short test averaged 149% of the salary for the long test. The logic of using the two approaches was that higher-salaried employees were more likely to meet all requirements for exemption, while lower-salaried employees needed a more-stringent duties test to qualify for exemption.

In the 2004 rulemaking, DOL switched from the long and short tests to a standard duties test and salary level test for exemption. The standard duties test did not include a quantitative limit on the percentage of time performing nonexempt work, making it closer in nature to the defunct short duties test. In addition, the new standard salary level test was lower than the inflation-adjusted salary levels used in the previous short tests. In other words, the 2004 rule generally paired a short duties test with a salary level below the short test levels used in the past.

The 2016 rule, which was subsequently invalidated, increased the standard salary level and left the standard duties test unchanged. Compared to the six previous rulemakings using the short and/or standard tests for exemption, the salary level in the 2016 rule ($913 per week) is below the inflation-adjusted levels in all but the 2004 rule. In addition, the ratio of the salary level test to the weekly minimum wage equivalent (40 hours per week at the prevailing minimum wage) in the 2016 rule is 3.15. The average ratio at the time of enactment of each new EAP salary threshold from 1949 through 2016 is 2.99, with a high of 3.33 (1949) and a low of 2.21 (2004).

Since 1938, measures of the salary level have fluctuated according to DOL’s identification of data sources most suitable for studying wage distributions and the department’s determinations of the proportion and types of workers who should be below salary thresholds, as well as its determinations of whether regional, industry, or cost-of-living considerations should be factored into salary tests.