Volume 39, Issue 4, April  2004

LegalEase

Coming Soon …
Looking Over New Overtime Regs
by David Barron

What was the number-one basis for class action suits against employers in 2003? Harassment? Discrimination? Think again. In the last ten years, litigation under the nation’s wage and hour laws has exploded. Virtually every major corporation, and many small ones along the way, have been sued for overtime, working off the clock or minimum wage violations. Making matters worse, employees are now working longer hours and wanting flexible schedules. Unfortunately, employers are bound by laws, which, in many cases, are more than 50 years old. This catch-22 has lead to morale problems, costly lawsuits and one of the most controversial proposals of the Bush Administration: overhauling the nation’s overtime laws.

Last year, the Department of Labor (DOL) proposed significant changes to the rules governing overtime. The newly proposed regulations included the first major regulatory overhaul of the duties tests for the various exemptions from overtime requirements since 1949. Also, for the first time since 1975, the proposed regulations would increase the minimum salary that an employee must receive to qualify for the exemptions. The proposed regulations were favored by businesses, but were attacked by unions claiming that millions would lose their eligibility for overtime. Several attempts were made in Congress to halt the regulations, but were unsuccessful. Now, almost a year later, the DOL has indicated that the regulations will be finalized soon. (Editor’s note: At press time the Department of Labor had just finalized drafting the regulations.)

Background on Overtime Laws
The proposed changes alter the well-established exemptions under the Fair Labor Standards Act (FLSA) from the overtime requirements. Simply, if an employee meets the definition of one of the exemptions below, the employer is not required to pay time-and-one-half for working more than 40 hours in a work week. 

Executive: This exemption covers most managers, supervisors and officers of a company. Required duties typically include managing a business (or department thereof), directing other employees and spending only limited amounts of time performing non-managerial tasks.

Professional: This exemption covers doctors, lawyers, engineers and generally recognized professions. The employee’s work must require knowledge of an advanced type in a field of science or learning customarily acquired through advanced intellectual study.

Administrative: This exemption is often confused by employers as a catchall and courts have struggled to determine exactly what jobs fit the exemption. Employees fitting this exemption must perform non-manual work directly related to the management policies or general business operations of the employer. They must also exercise discretion and independent judgment.

Examples of employees found to fit this exemption are human resources managers, marketing employees and some project coordinators.

Outside Sales: This exemption is very limited. Qualifying employees must be primarily engaged in selling activity away from the employer’s place of business. Other duties cannot exceed 20 percent of the salesperson’s time.
In addition to the duties tests described above, exempt employees must be paid a salary that meets the minimum prescribed by law. Further, employers cannot dock a salaried employee’s pay except under limited circumstances.

The New Regulations
The proposed regulations plan to alter the rules set forth above in several important areas. These areas are explained below.

1. Business owners exempt from salary basis test: Under a new subsection of the executive exemption, any employee who owns at least a 20-percent equity interest in his employer is proposed to be exempt regardless of whether he is paid on a salary basis.

2. DOL aims to simplify the administrative exemption: One stated goal of the proposed regulations is to eliminate some of the existing regulatory provisions that have proven difficult to interpret and have been the subject of extensive litigation. Perhaps no area needs such simplification more than the administrative exemption. Under the proposal, a worker will no longer have to exercise “discretion and independent judgment” to be an exempt administrative employee. DOL is jettisoning this standard and the scores of legal decisions interpreting it. Instead, DOL proposes to introduce a requirement that the employee hold “a position of responsibility with the employer.” To meet this requirement, the employee would have to perform “work that requires a high level of skill or training” or “work that, by its nature or consequence, affects the employer’s general business operations or finances to a significant degree.” Of course, it remains to be seen whether these new terms that DOL has introduced into the rules will themselves result in the very “confusion and litigation” that DOL hopes to avoid.

3. Professionals do not need college degree: Presently, a major focus of the professional exemption test is the amount of advanced, formal education that the worker has obtained. Under the proposed regulations, DOL would recognize that a learned professional employee may acquire knowledge by on-the-job experience, technical skill training or equivalent experience, and not merely by earning a college degree. Although the existing regulations also contemplate this possibility, the proposed regulations make it more explicit and thus easier to assert. This change is likely to broaden the availability of the exemption. 

4. DOL clarifies computer employee exemption: The proposed regulations would consolidate the patchwork quilt of rules that currently govern exemption of certain computer programmers and analysts. Computer employees would be exempt if they meet a new duties test and are paid on a salary basis or at an hourly rate of at least $27.63/hour for all hours worked.

5. Proposed rules broaden the outside salesperson exemption: With respect to outside sales employees, DOL proposes a requirement that outside sales persons must have sales as their primary duty and must engage in those sales “customarily and regularly.” This test eliminates the prior requirement that outside sales persons could spend no more than 20 percent of their work time performing non-exempt duties. This change could result in more route drivers who make sales and also maintain their trucks being exempt, as long as their primary duty is outside sales.

6. Minimum salary increased: Under the proposed regulations, the minimum salary needed to be an exempt employee would increase to $425/week ($22,100/year) from the former minimum of as little as $150/week. 

7. Special rule for “highly compensated employees:” DOL proposes a new exemption test for highly compensated individuals earning more than $65,000 per year. Such employees would qualify as exempt executive, administrative or professional employees if they merely perform one or more of the exempt duties of a white-collar employee, but do not meet the full duties test for the claimed exemption. 

8. DOL reaffirms permissibility of paying overtime to exempt employees: The proposed regulations make absolutely clear that an exempt employee may be paid overtime compensation on an hour-for-hour basis. In addition, an exempt employee’s entire pay may be calculated on an hourly basis so long as the employee is guaranteed a minimum salary that bears a reasonable relationship to the amount actually earned.

9. New rule for disciplinary suspensions: The proposed regulations retain the prohibition on pay docking for partial day absences, but would permit deductions for full-day absences (or multiples thereof) for disciplinary suspensions. Thus, for example, an employer could now suspend an employee for three days without pay (as opposed to a whole work week suspension) for inappropriate behavior, such as sexual harassment.

Where Do We Go From Here? 
The net effect of the proposed regulations will likely be to expand the number of workers qualifying for the overtime exemptions. This could save employers millions of dollars in overtime costs. That said, the changes will generate significant controversy, since it is an election year. Employers moving too quickly to change employee classifications may find themselves facing disgruntled employees and costly lawsuits. Given this prognosis, it is not too early for employers to consider how their compensation practices, personnel policies and employee manuals could be impacted if the regulations take effect—and that eventuality appears likely. Making incorrect determinations on whether employees are exempt can be a costly mistake. Employees can sue for up to three years of overtime, and may also be entitled to double damages and attorneys’ fees. In sum, this is one area where expert legal counsel is critical, and a periodic audit of your pay practices can be a wise preventative measure.


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