FLSA Overtime Changes Threaten Exempt Status

From the San Diego State Bar – Business Law Section

By: Ogletree Deakins and Diane M. Saunders.

FLSA Overtime Changes Threaten Exempt Status

The National Retail Federation’s (NRF) Committee on Employment Law held its spring meeting last week, and one of the hottest topics on the minds of the attendees concerned the impact that the U.S. Department of Labor’s proposed changes to the overtime regulations would have on retail and hospitality industry employers.

On March 13, 2014, President Obama signed a presidential memorandum to update the overtime regulations under the Fair Labor Standards Act (FLSA). The memorandum specifically directs the Secretary of Labor to “propose revisions to modernize and streamline the existing overtime regulations.” In doing so, the Secretary of Labor is required to “consider how the regulations could be revised to update existing protections consistent with the intent of the Act; address the changing nature of the workplace; and to simplify the regulations to make them easier for both workers and businesses to understand and apply.” The rulemaking is expected this summer and is anticipated to change the criteria for an employee to be exempt under the outside sales exemption. No details have been released about what changes may be proposed, but a quantification analysis for determining how much time an employee spends on “primary duties” is a possibility.

The proposed changes are expected to have a huge impact on retail and hospitality employers. Among other things, retail and hospitality employers fear that more managers might lose their exempt status in favor of hourly pay under the new rules if the Secretary of Labor adopts a bright-line rule that managers are nonexempt if they perform the same duties as the employees they oversee, such as stocking shelves, working a cash register, or assisting a customer with a return.

In response to the coming changes, NRF commissioned a comprehensive study of retail and hospitality managers to determine how they would react to the proposed changes. According to the NRF, the vast majority of retail and restaurant managers surveyed reported believing that a transition of their status from salaried to hourly would have negative consequences on the managers themselves and on customer service. Among other findings in the study, the managers surveyed reported that they spent their days multitasking and managing employees while simultaneously performing many nonmanagerial tasks. Specifically, the managers reported that they spent their days as follows: 66 percent managing employees; 50 percent on customer service; 20 percent on employee training; 15 percent on paperwork; 9 percent ordering supplies/product and another 9 percent stocking; 8 percent merchandising/developing displays and another 8 percent scheduling employees. According to the study, proposed changes that would divest managers of their executive status and impose rigid requirements on how they spend their day and perform their jobs would serve to threaten the managers’ self-worth and undermine the benefits of the managerial role. Nearly half of those surveyed indicated the proposed changes would make them feel like they were performing a job as opposed to pursuing a career. Close to half of those surveyed also believed they would earn less money if they were made hourly because they would lose their ability to receive bonuses.

The results of this NRF study raise serious concerns about the future pipeline for retail and hospitality managers if the proposed changes create the type of fundamental changes to the current roles of retail and hospitality managers that are projected. The managers’ reported fears about the negative impact on customer service and the possibility of disorganization and inefficiency are also serious. Another worry is that the limitations that would be placed on managers’ ability to lead by example would undermine the efficacy of employee training and morale. The NRF, through its study, is garnering national attention to this important issue involving retail and hospitality employers. We can expect NRF, which represents both retail and hospitality employers, to continue to focus on this issue in the months to come. In the meantime, retail and hospitality employers will need to consider the possible impact of the proposed regulations not only on their compensation structure, but also on their operations and training programs, as well as on the engagement of their managers.