Heisenberg, Zeno, and the Department of Labor: A problem with the proposed FLSA overtime regulations

This Heisenberg is not Walter White from “Breaking Bad,” but his namesake Werner Heisenberg, the physicist credited with identifying the “observer effect”—the principle that the act of observation itself alters the phenomenon being observed (i.e., the type of measurement done on a system affects the end state of that system). In popular jargon, this often is referred to (albeit mistakenly) as the Heisenberg Uncertainty Principle.  But regardless of the label, there is a fundamental flaw in the U.S. Department of Labor’s (DOL) proposed changes to the overtime pay exemptions of the Fair Labor Standards Act (FLSA).

The statute exempts bona fide “white-collar” workers from its overtime pay requirements, but leaves it to the DOL to prescribe regulations that define who is bona fide.  These regulations traditionally require a job to satisfy a three-prong test to be exempt.  First, the employee must be paid a pre-determined and fixed amount that is not subject to variation because of the quality or quantity of the work performed.  This is known as the “salary-basis” test.  Second, the salary must meet a specified minimum dollar amount—the “salary-level” test. And finally, the employee’s job duties must primarily involve executive, administrative, or professional duties.  This is known as the “duties” test.  The proposed regulations preserve those elements but change how the minimum salary is defined.

The DOL proposes to increase the minimum salary to the amount paid to the 40th percentile of all salaried employees:  “[W]e are proposing a salary level of the 40th percentile of the weekly wages of all full-time salaried workers nationwide.”  The DOL also proposes a complementary change—to “automatically update” the salary threshold.  The DOL seeks comments on proposals to index the minimum salary to either of two alternative benchmarks.  As we would have told Heisenberg—the TV character, not the physicist—one of these is a really bad idea (not that we are fans of the other).  

The really bad idea is to recalculate annually the salary level that corresponds to the 40th percentile: “The ‘fixed percentile’ approach would permit the Department to reset the salary level test by applying the same methodology proposed in this rulemaking to update the standard salary level.”  This would automatically update the salary threshold by resetting it to whatever salary at the time corresponds to the 40th percentile among salaried workers in the United States.

The problem, as Heisenberg the physicist quickly would recognize, is the law itself will change both the salary data it considers and the yardstick that defines the overtime exemption. The legal threshold will change because the salary that corresponds to the 40th depends on the composition of the salaried group, as opposed to those employees paid hourly.  But an important reason many employers pay employees on a salary basis is to qualify for the overtime exemptions.  If an employee cannot meet the minimum threshold, in which case the employee must be paid overtime, the motivation to pay on a salary basis is greatly reduced. The Department of Labor estimates that approximately 4.6 million employees who now are exempt no longer will pass the minimum salary test if the threshold is set at the 40th percentile.  Employers therefore may no longer wish to pay these employees on a salary basis and will convert them to hourly non-exempt employees.  This will drop them from the ranks of the salaried, and these lower paid employees will no longer be in the lower percentiles of the new salary distribution that determines the annual update.  A hypothetical will illustrate this process and its consequences.  Although the reality may be less extreme in degree, the conceptual problem is inescapable. 

Suppose employers pay salaries solely to qualify employees for the white-collar exemptions.  The effect of raising the minimum salary to the 40th percentile means that employees below that threshold no longer qualify for the exemption.  Because they must be paid overtime, there is little reason to maintain their salaried status.  The following year, the 40th percentile will be determined by reference to a group of salaried employees that is purged of the lowest paid.  Inevitably the new salary threshold will exceed the previous level, very likely by a substantial amount.

Raising the minimum salary to this new level will define another group of salaried employees who no longer qualify as exempt.  This group, in turn, will exit the salary ranks, and this attrition again will require the DOL to raise the salary threshold once again, to the 40th percentile of this diminishing group of employees who remain exempt.  Those employees below this threshold, like their predecessors, will become hourly, and so it goes, until one might suspect no exempt employees remain.

But Zeno’s Paradox rescues the white‑collar exemption from the DOL’s plan to apparently abolish that exemption altogether.  Just as we know that you can never exit a room by halving the distance to the door with each step, so too can we be sure that the DOL’s proposal of automatically updating the salary threshold to the 40th percentile will never quite extinguish all exempt white-collar employees.  Zeno reminds us there will remain at least one employee who will continue to meet the salary-level test, but boy will he or she be working a lot of hours!  Which brings us back to Heisenberg—the drug dealer, not the physicist:  Sometimes what seems like a good idea at the time ends with very bad consequences. Maybe it’s time to rethink this one.

Haase and King are both labor and employment lawyers who specialize in litigating wage and hour class and collective actions at the law firm Littler Mendelson, the world’s largest labor and employment firm representing management.