A 2016 federal overtime pay rule that would have improved the lives and livelihoods of modest wage earners in all states was determined to be invalid by a district court judge in Texas. But while the business interests that backed the court case succeeded in blocking DOL’s implementation and enforcement of a rule that would have benefited 12.5 million workers, policymakers in the states have an opportunity to step up and support working people. The 2016 federal rule would have extended automatic overtime pay protection to salaried workers making up to $47,476 a year; in addition, under the rule, the exemption threshold would be automatically updated every three years to keep pace with overall wage growth. Under the old, outdated federal rule, mid-level managers at retail outlets and restaurants, for example, were only eligible for overtime pay if they made less than $23,660 per year, meaning their employers could require them to work 60- or 70-hour weeks without paying any compensation for the extra hours beyond 40. Under the old rule, there was no provision for updating the threshold, and its value has eroded dramatically since 1975, when it was last fully adjusted for inflation.

We recommend that states follow the lead of the U.S. Department of Labor’s 2016 final rule and:

• Raise the salary threshold required for exemption from eligibility for overtime pay (avenues for raising the threshold are described below). Base the threshold on a simple, appropriate benchmark (options for setting the threshold are given below).
• Establish an automatic update of this salary level at regular intervals according to the same benchmark.

We are not opposed to strengthening the “duties test” for determining eligibility for overtime pay protection (more on the duties test below). However, for the sake of simplicity in messaging and implementation, we recommend focusing on the salary threshold alone.

State action is imperative because the path forward at the federal level is unclear. The Trump administration DOL has declared its intent to appeal the court’s decision—defending DOL’s right to set a threshold—but is likely to set the threshold at a much lower level (in the low $30,000s). A threshold at that level would leave unprotected nearly three-fourths of workers who would have benefited under the 2016 raise.1 Campaigns to raise overtime thresholds in the states could create momentum to push for a stronger federal standard. For this reason, we encourage state organizations to focus on state thresholds but also to follow the federal overtime rulemaking process and any congressional action on EPI’s overtime issue page (www.epi.org/research/overtime/) and push for a stronger federal overtime rule if the opportunity arises.

Specific ways state organizations can support efforts to raise the overtime salary thresholds in their states

Modest wage earners in all states have lost automatic overtime protection due to the blockage of the new federal overtime pay rule.2 The losses are smaller in New York and California, which have both enacted state policies establishing overtime salary thresholds higher than the $23,660 federal level.

State options for raising the overtime salary threshold

There are several possible avenues for raising the overtime salary threshold in states. State organizations may pursue updates to state thresholds in the following ways:

• Help draft and promote state legislation providing the protections that the 2016 federal overtime rule would have provided to workers. The strongest action states could take at this moment would be to pass legislation raising the state overtime threshold, following the parameters of the 2016 federal overtime rule. Even in states where passage of such a law would be difficult, introducing it and seeking public hearings or staging press conferences would raise awareness and could help create a constituency to advocate for better protections for overworked low- and moderate-wage workers.
• Start a ballot initiative so that voters can weigh in to provide the protections that the federal overtime rule would have provided to workers. In states that are amenable to ballot initiative campaigns, groups could place an initiative on the ballot to raise the state’s overtime threshold to provide more low- and moderate-wage workers with overtime pay.
• Support executive action. In some states, the overtime salary threshold may be changed through an administrative regulation. Working with the governor and/or state department of labor could be a good way to obtain an administrative change, if this is an available option and the local political climate is conducive to such a change.

How the salary threshold fits into the “white collar exemption” to overtime protections

The federal overtime regulation, which is authorized under the Fair Labor Standards Act (FLSA), is the basis for many state overtime rules and serves as the effective regulation in states that lack their own overtime rules or have weaker overtime rules. The federal law says that workers must be paid time and a half for every hour worked beyond 40 in one week. But it carves out exemptions—worker groups that employers could pay overtime to, if the employer wanted to, but are not required to. One key exemption is for workers considered sufficiently senior in duties and in pay that they don’t need overtime protection.3 In order for a worker to be exempt from (ineligible for) guaranteed overtime pay based on this “white collar exemption,” all three of the following requirements must be met:

1. Salary basis test: The employee must be paid a salary, not by the hour or on a piece-rate basis.
2. Salary threshold test: The employee must be paid above a certain threshold. Before the Department of Labor updated the regulations in 2016, this threshold was $455 weekly, or the equivalent of $23,660 annually for an employee who works year-round.
3. Duties test: The employee must perform actual executive/managerial/professional duties, as defined in the regulations.4

If any one of these three requirements isn’t met, a worker is eligible for overtime pay. If all three requirements are met, the worker is exempt from the overtime protections of the Fair Labor Standards Act and the employer does not have to pay the worker overtime.

How the U.S. Department of Labor’s 2016 final rule updated the white collar exemption

The 2016 U.S. DOL rule updated the overtime salary threshold to more closely track a level of salary that would reasonably be paid to a managerial, administrative, or professional worker today.

• The rule set the threshold at the 40th percentile of weekly earnings of full-time salaried workers in the census region with the lowest wages (the South).

• This adjustment (which used earnings data from the fourth quarter of 2015) raised the salary threshold required for exemption to $913 weekly, which translates into $47,476 for a year-round worker. (Note that if data from the third quarter of 2017 were used, the threshold would be $951 weekly.5)
• The rule established an automatic update of this salary level every three years to precisely the same standard (i.e., every three years, the salary threshold would be adjusted to the updated 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region).
• The rule did not change the duties test or the salary basis test.

State options for setting the standard for the salary threshold for exemption

As noted, the 2016 rule is in legal limbo. Organizations seeking to raise wages for low- and middle-wage workers in their state will want to consider what is the most meaningful standard to propose for setting the salary threshold in their state. Options include:

• Raise the threshold to match the 2016 federal rule standard. However, because the federal threshold is set to the 40th percentile of weekly earnings of full-time salaried workers in the South, this option makes less sense for states outside of the South.
• Adapt the 2016 federal standard based on the wages in the state’s census region. To set the salary threshold to the 40th percentile of full-time salaried workers in a state’s census region, use publicly available data provided quarterly by the Bureau of Labor Statistics quarterly (these data are also provided in the tables below).
• Adapt the 2016 federal standard based on the wages in the state. To set the salary threshold to the 40th percentile of full-time salaried workers in a specific state, use data calculated by EPI and provided in the tables below.
• Set the threshold to a multiple of earnings at the state’s minimum wage. For example, in California, the threshold for exemption is set at a monthly earnings rate equivalent to two times the state’s minimum wage, assuming a full-time schedule.

Why is the 40th percentile of earnings an appropriate threshold for overtime eligibility?

The “40th percentile of earnings” means that 40 percent of full-time salaried workers earn at or below that amount. The Obama administration Department of Labor concluded that the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region (currently the South) represented the most appropriate line of demarcation between workers who are bona fide executives, administrators, or professionals, and those who are not. It represents a much-needed increase from the prior salary threshold, which covers less than 7 percent of full-time salaried workers. But it is still lower, after taking inflation into account, than the threshold was in 1975. In 1975, more than 60 percent of workers were below the salary threshold; under the 2016 threshold it is 33 percent.6

Draft language

Below is language that may be used to draft overtime legislation. This language may also be adapted for use in an executive order or state DOL rule. The bracketed and boldfaced text would be modified depending on what threshold is chosen. Note that all of the named occupations in clause (A)(1)(c) are standard for the exemptions in statutory language.

A. (1) To qualify as an individual who is employed in a bona fide administrative, executive, or professional capacity and is exempt from the statute’s overtime pay requirements, an individual shall be compensated on a salary basis:

a. In an amount per week not less than [the 40th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage census region]; and

b. In an amount per week, exclusive of board, lodging, or other facilities, that is not less than:

1. [$913]; and

2. Beginning [January 1, 2018], determined by the Commissioner under Subsection (B) of this section.

c. The salary requirements in this section shall not apply to teachers, certain licensed medical professionals, licensed attorneys, or other individuals employed in a professional capacity to whom the salary requirements for exemption under U.S. Department of Labor regulations in effect in 2015 would not have applied.

(2) The required amount of compensation per week under Paragraph (1) of this Subsection may be:

a. For an individual employed in an administrative capacity or a professional capacity, paid on a fee basis; or

b. Translated into equivalent amounts for periods of time longer than one week, including compensation that is paid on a biweekly, semimonthly, or monthly basis.

B. On [January 1, 2021], and every [three years] thereafter, the Commissioner shall adjust the salary amount under the Subsection (A) of this section to equal [the 40th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage census region in the second quarter of the year immediately preceding the update published by the United States Department of Labor, Bureau of Labor Statistics].

C. The Commissioner may adopt regulations to implement this section.

A note on the duties test

As noted earlier, workers whose earnings exceed the salary threshold still qualify for overtime pay if they do not have work duties that are managerial, administrative, or professional in nature. (The U.S. Department of Labor’s Wage and Hour Division has a fact sheet that explains this “exemption for executive, administrative, professional, computer, and outside sales employees.”7 State DOLs may have fact sheets for their own laws.)

Changes at the federal level in 2004 simplified the duties test by switching to a single duties test but made it less rigorous by allowing workers to perform an unlimited amount of nonexempt work (such as operating cash registers, stocking shelves, and sweeping floors) and still be classified as an exempt manager or professional. Here, states should follow the lessons learned at the federal level. During the 2016 rulemaking process, changes to the duties test were overwhelmingly opposed by businesses, with many articulating that most employers are already very familiar with the standard duties test and that a new duties test would be complex to learn and apply in practice. In the 2016 final rule, the U.S. Department of Labor decided not to change the duties test because it would have been disruptive to employers and businesses to learn and apply a new test. That is a key reason why the federal rule significantly raised the salary threshold—so that it would cover workers subject to the less rigorous, and less protective, duties test. States that are unable to substantially raise the salary threshold (say, to the 40th percentile of salaried earnings or higher) would need to revert to a more rigorous duties test. California, for example, has enacted a more protective duties test than the federal standard.

EARN and Economic Policy Institute resources

The EARN staff at EPI and the network of state EARN affiliates are available to support organizations and officials who are interested in taking action on overtime policy. The Economic Policy Institute has a broad array of policy, data, and legal resources, as well as social media and communications assets that can support state efforts on this and other economic issues. Please contact us at earn@epi.org for further information.

Endnotes

1. In his hearing to be confirmed as Labor Secretary, Alexander Acosta suggested that an overtime salary threshold equivalent to the 2004 threshold adjusted for inflation might be appropriate. See “Labor Secretary Nominee Acosta on Overtime: $33K Minimum Salary?” (user-created clip by Tammy McCutchen on C-SPAN, March 23, 2017). The 2004 threshold adjusted for inflation would be around $31,000 today. Importantly, while the OT threshold was raised in 2004, it did not come close to adjusting for inflation since its prior increase almost 30 years earlier. If the 1975 threshold had been adjusted for inflation, it would be well over $50,000 today. If the threshold were $31,000, 9.1 million (nearly three-fourths) of the 12.5 million benefiting from raising the threshold to $47,476 would be left out. Only 3.4 million eligible workers earn at least $23,660 but below $31,000 (EPI analysis of 2015 Current Population Survey Outgoing Rotation Group data). The Trump administration’s efforts to weaken the overtime rule extend back to July. See Heidi Shierholz, “The Trump Administration Is Trying to Take Away the Rights of Millions of Americans to Get Paid for Their Overtime,” Economic Policy Institute, July 25, 2017; and Ronald Klain, “An Issue Democrats Can Love: Overtime,” Washington Post, September 3, 2017.

2. Ross Eisenbrey and Will Kimball, The New Overtime Rule Will Benefit Working People in Every State, Economic Policy Institute, May 18, 2016.

3. This “white collar exemption” is in the statute, FLSA section 13(a)(1), but the statute delegates authority to the U.S. Secretary of Labor to define the terms and scope of the exemption, which is done in the regulations. Exempt workers are not technically ineligible for overtime pay because there is no law stopping their employers from providing it to them. The critical fact—and why they are described as ineligible for automatic overtime protection—is that their employers cannot be required to provide overtime pay to them.

4. U.S. Department of Labor, Wage and Hour Division, “Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Acts (FLSA),” revised July 2008.

5. “Research Series on Deciles of Usual Weekly Earnings of Nonhourly Full-Time Workers,” Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics, last modified October 18, 2017.

6. Authors’ analysis of Current Population Survey Outgoing Rotation Group microdata, various years.

7. U.S. Department of Labor, Wage and Hour Division, “Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Acts (FLSA),” revised July 2008.