Changes in Overtime Exemption Standards

By Steven S. Greene

The Department of Labor is preparing to issue regulations that are expected to dramatically change overtime exemption standards, causing many employees to be reclassified to non-exempt status. These regulations will have a particularly significant impact on the banking industry.

Last March, President Obama directed the secretary of labor to review and propose revisions to overtime exemption regulations. The president advised that the regulations were outdated and, therefore, “millions of Americans lack protection of overtime.” The Department of Labor then began a review process with the clear objective to limit application of federal overtime exemptions. During its evaluation, the department met with major business, human resources and compensation associations including, in November, banking industry representatives. It became obvious that the department was looking for ways to generate a significant reclassification of exempt employees.

The new standards are expected to call for an increase in the salary level required for exempt status from the current $455 per week to a figure in the $800 range. The department justifies this dramatic increase by arguing that in 1950, when the salary threshold was initially established, the weekly salary level was $844, adjusting for inflation.

The new regulations also will introduce a new “duties” test for executive, administrative, professional and computer professional exemptions. Currently, an individual may qualify for the executive exemption if their “primary duty” involves managing a recognized subdivision of the bank. The key term is “primary duty,” which for 65 years has meant “the principal, main, major or most important duty that the employee performs.” In the past, employees who devoted a minority of their work time to exempt work routinely would have satisfied the primary duty test.

Consider the branch manager at a location, with four direct reports. That person may devote 30 percent of his or her work time to management responsibilities and 70 percent to lending, customer service and tasks similar to those done by others at the branch. Under current standards, that branch manager would qualify for the executive exemption.

The new “duties” test is expected to be absolutely quantitative: Individuals are exempt only if they devote a specific percentage of their actual work time to exempt responsibilities. We expect the proposed percentage to be at least 51 percent of actual work time.

If the branch manager does devote 30 percent of his or her time to management, and the remaining duties are considered non-exempt by the Department of Labor, then—as absurd as it sounds—that position would need to be reclassified as non-exempt with the branch manager earning overtime for time worked in excess of 40 hours.

Under the new duties test, banks will need to evaluate current positions by performing a job analysis of what work is actually performed or expected each week. The job analysis will need to distinguish between tasks considered exempt by federal regulators and tasks they view as non-exempt. Job descriptions will need to be updated, and it will be advantageous to reflect bank-expected time allocations in the body of those job descriptions. After conducting these job analyses, we anticipate that the industry will find many positions requiring reclassification as non-exempt.

The Department of Labor release will consist of “proposed” regulations. The federal agency will solicit comments and feedback. However, we do not anticipate any meaningful changes to these standards. The objective has been clearly articulated: to cause employers to reclassify individuals to non-exempt status. The government will want to implement the regulations quickly, as President Obama’s term comes to a close. Once implemented, regulations become difficult to change; future administrations are typically reluctant to “roll back the clock.”

These changes will have a significant impact on community banks’ financials, staffing, responsibilities and human resource management. For that reason, we believe that human resource professionals will need to study the new standards, conduct job analyses and begin to advise senior management regarding how to mitigate the considerable impacts.

Steven S. Greene is president of Employment Law Compliance, Inc.