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DEPARTMENT
OF LABOR RELEASES NEW
OVERTIME REGULATIONS
For the first time in more than 50 years, the U.S. Department
of Labor (DOL) has undertaken a major revision and clarification
of an employer’s duty to pay overtime under the Fair
Labor Standards Act (FLSA).
You may recall that the DOL first proposed new regulations
in March 2003 -- and promptly ignited a firestorm of protest
from unions and other groups who claimed the changes would
unfairly reduce the number of employees entitled to overtime.
The new regulations do not go as far as the March 2003 proposal,
but they do provide very significant revisions to current
law. The final regulations were published in the Federal
Register on April 23, 2004 and, barring Congressional intervention,
will become effective 120 days thereafter.
WHAT DOES IT ALL MEAN TO YOU?
Employee lawsuits and DOL regulatory proceedings
against employers who have failed to make proper overtime
payments have dramatically expanded in recent years. Some
of the verdicts have extended into the tens of millions of
dollars. We expect that, when and if they become effective,
these new regulations will spawn substantial litigation by
employees or individuals, as well as DOL enforcement proceedings,
against employers who have not implemented updated policies
and procedures and misclassified and incorrectly paid non-exempt
employees. Keep two things in mind in the interim.
First, unless and until the new regulations
become law, you must continue to abide by the law as it currently
exists. You can be sure that employees, and the attorneys
who represent them, will be looking for employers who “jump
the gun.”
Second, the Washington pundits are predicting
that these regulations will most likely be implemented on
schedule. You can be sure that those same employees and attorneys
will be targeting late starters, and you will need to begin
the implementation process soon, so that you will be ready
to flip the switch when the time comes.
WHAT’S CHANGED?
Here is a summary of some of the key changes, and some suggestions for
your company’s implementation process. Keep in mind that the regulations
are lengthy and complex, and this E-Mail Alert focuses on selected highlights
only.
- $23,660
per year – a new magic
number. Under the new regulations, employees
earning at a rate less that $455 per week, or $23,660
per year,
will be entitled to overtime if they do not fall within
one of the so-called white-collar exemptions of “executive” “administrative” or “professional.” Under
the current regulations, the threshold for this “salary
level test” was $155 per week/$8,600 annually.
The DOL estimates that this change will expand overtime
protection for 6.7 million workers, including 1.3 million
salaried white collar workers.
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- $100,000 per year – another magic number. Employees with “total annual compensation” (including
non-discretionary bonuses and commissions) of at least
$100,000 are deemed exempt from overtime under most
circumstances.
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- What happens between
$23,660 - $100,000? As before, a key determinant
of whether an employee is exempt from overtime requirements
will
be whether the employee is a bona fide “executive,” “professional,” or “administrative” employee.
These are all carefully defined terms. The new regulations
tweak the definitions in significant ways, and for the
first time specify certain positions that will qualify
for the exemptions. These definitions have been heavily-litigated
in the past, and more litigation under the new regulations
can be easily foreseen. For the purposes of determining
if an employee satisfies one or more of these definitions,
the new regulations adopt a “primary duty” test – the
issue will be whether the principal, main, major
or most important duty performed by the employee
meets the definitional
criteria, and not whether the employee spends most
of his or her time performing those duties.
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- Computer employees.
The requirements to exempt “computer employees” are
essentially the same as in the existing regulations which
require that, to be exempt, a “computer employee” (as
defined) be paid at least $27.63/hour. The final regulations
do, however, narrow the exemption to exclude only employees
engaged in “computer manufacture and repair.”
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- Outside sales employees. The new regulations maintain,
with some alterations, an exemption for outside, but
not inside sales employees.
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- The “long test” and “short
test” for exemptions will be gone. Current law
imposed an arcane, tedious methodology to determine whether
an employee’s duties fit within the executive,
professional, administrative, computer employee or outside
sales definitions. Known as the “long test” and
the “short test,” these methods were as difficult
to understand as they were to apply. Thankfully, the
new regulations eliminate them, and substitute a more
common sense “primary duty” test which
focuses on the principal, main, major or most important
duty
performed by the employee on a customary and regular
basis.
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- Salary “docking.” Under current law,
unwary employers who “dock” the salaries
of exempt employees run the risk of losing the overtime
exemption for those employees. The new regulations
mollify those risks somewhat and provide much needed
guidance. Employers will now be permitted to impose
salary deductions of otherwise exempt employees under
seven discrete and more plainly-described situations.
The new regulations also provide a “safe harbor” for
employers to preserve an employee’s exempt status
in the event impermissible deductions are made. An
exempt employee’s status will not be defeated
if the employer has: (a) a clearly communicated policy
(in writing) prohibiting improper deductions, including
a complaint mechanism, (b) reimburses employees for
any improper deductions, and (c) makes a good faith
commitment to comply in the future. This “safe
harbor” will not be available, however, if the
employer willfully violates the policy by continuing
to make improper deductions after receiving employee
complaints. This new test replaces the current law’s
so-called “window of correction” for improper
deductions which was the subject of conflicting court
rulings.
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- Additional pay will not jeopardize overtime
exemption. Under current law, an employer could jeopardize an
employee’s exempt status by paying the employee
additional pay for additional work. The new regulations
expressly approve additional pay to salaried exempt
employees (e.g., bonuses, straight-time pay for work
beyond 45 hours/week).
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- Exemption
for owners. The new regulations require that in order
to be exempt, owners must hold at least a 20% equity
interest in an enterprise and be “actively
engaged in its management.”
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WHAT YOU SHOULD DO NOW
Some preliminary suggestions:
- Identify all currently
classified exempt positions with salaries below the
new “floor” of
$23,600/year and above the new “ceiling” of
$100,000. Consider the wisdom of adjusting compensation
rates for certain positions to fall within or without
of these parameters;
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- Determine if all currently
exempt executives have authority to hire/fire or if their
recommendations are given weight in such action. Consider
revisions of duties to achieve desired exempt/non-exempt
results;
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- Review and assess all ‘borderline’ exempt
positions respecting which your company may have
deferred overtime decisions while awaiting the final
rule;
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- Implement clear policies
requiring that all non-exempt employees record all working
time, and make certain payroll policies are in compliance;
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- Consider drafting or
revising job descriptions to comply with the changes
in the new regulations, particularly the “white-collar” classifications
for exemption;
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- Revise policy and procedural
manuals (both in print and electronic), as needed, to
communicate disciplinary and salary docking policies.
in compliance with the new regulations;
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- Have your overtime
policies and procedures “audited” for
present and future compliance, and train your personnel
to avoid
violations.
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We provide the legal audit, analysis and training services
the FLSA overtime regulations will require. Let
us know if we can help.
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