If the Obama administration follows through on overtime pay reforms, businesses will have to realign payroll policies for millions of salaried workers and a flurry of lawsuits could follow asking courts to clarify the new standards.
Legal battles over overtime pay are already common. Workers often sue for unpaid wages, claiming they were misclassified as managers, who generally are ineligible for overtime pay, even though they spend most of their time handling the same tasks as overtime-eligible hourly workers.
If, as some expect, the U.S. Labor Department reverts to a classification test it used before 2004, it would likely make more workers overtime-eligible, and a new round of litigation could result as companies sort out employee reclassifications.
"It's immediately after new regulations (are in force) that employers are particularly vulnerable to having a suit filed because they could not act fast enough," said Littler Mendelson lawyer Tammy McCutchen, an administrator in the Labor Department's wage-and-hour division under President George W. Bush.
President Barack Obama, moving to bypass Republicans in Congress who are blocking a U.S. minimum hourly wage increase, said on Thursday he was directing Labor Secretary Tom Perez to revive "common-sense principles behind overtime" rules, initiating a process that will likely take months to complete.
To carry out Obama's initiative, the Labor Department will consider raising the salary threshold above which employers do not have to pay overtime to their managers. It will also consider changing a test used to determine which workers are managerial and which are not, a White House official said.
The threshold was last raised in 2004 to $455 per week under Bush, less than half of what it was almost 40 years ago on an inflation-adjusted basis.
Also under Bush, the department - against unions' objections - significantly revised the "primary duty" test it uses to determine which employees can be classified as managers and supervisors.
"If you're making $23,000, typically you're not high-end management," Obama said as he signed a memo to Perez.
The president's request underlines Democrats' pro-worker campaign messages going into the November midterm elections, which Obama's party is struggling to hold onto control of the U.S. Senate.
Business groups have already indicated they oppose the changes, which they say will lead to job losses and confusion for employers.
"Employers who carefully considered the proper classification of their workforce 10 years ago would have to go through that process all over again, and would again be faced with uncertainty, administrative burdens and costs that are contrary to the goal of job creation," said David French, of the National Retail Federation, which represents department stores, grocers, chain restaurants and Internet retailers.
PRIMARY DUTY TEST
The president's memo was thin on detail. In coming months, the department will invite public input on proposed changes before issuing a final rule.
The department's "primary duty" test now classifies workers based on the "principal, main, major or most important duty that the employee performs." Employees who spend more than half of their time on a specific duty, such as managing other workers, will generally satisfy the primary-duty requirement.
But department guidance makes clear that there is no hard-and-fast way to determine a primary duty. Even an employee who spends less than half their time managing others may be classified as a manager if other factors support that designation.
"The duties test is where a lot of the litigation is," in wage-and-hour cases, said John Meyers, a partner at Barnes & Thornburg who defends companies in employment litigation.
Advocates for workers said the "primary duty" test was changed so significantly in 2004 that it no longer has much meaning.
TEST OF TIME
Before 2004, the main criteria used to determine a worker's primary duty was the amount of time they spent on a duty.
The revisions said a primary duty would no longer be based solely on time spent, but also on other, subjective factors.
Ross Eisenbrey, vice president at the liberal-leaning Economic Policy Institute in Washington, called the current test an "abomination."
"Being a lead dishwasher is enough to make that person an exempt executive even though they spend essentially all of their time washing dishes," Eisenbrey said. "Under the law as it stands now, it's pretty much left to the employer to say."
With his colleague Jared Bernstein, a former economic adviser to Vice President Joe Biden, Eisenbrey last year urged the White House to consider raising the salary threshold that puts overtime pay beyond the reach of some so-called managers.
Some states have diverged from the department's post-Bush administration method for determining a worker's primary duty, at least in state-level worker misclassification lawsuits.
California, for example, uses a strict time test. Any worker who spends more than 51 percent of their time doing non-managerial work can get overtime pay under state law.
McCutchen, the lawyer, said there are indications that the Obama administration favors a California-like approach. She said it would take at least a year to complete any new regulations.
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