Old OT Regs Get An Overdue Review

August 22, 2003
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HOLLAND — The U.S. Department of Labor is proposing revision of Fair Labor Standards Act Part 541 regulations, also known as the "white collar exemptions" regulations.

The federal government predicts that about 1.3 million American workers will be affected by the proposed changes.

The changes regard employee exemptions from overtime requirements.

The Department of Labor categorizes "white collar" employees as executive, administrative, professional and outside sales employees and defines each category according to responsibilities and work performed.

Those four categories of employees are normally exempt if they meet certain specific criteria, said Robert Boonin, an attorney practicing in Butzel Long's Holland and Ann Arbor offices.

Boonin's practice is concentrated in the areas of labor, employment discrimination, public contract and education law.

The Department of Labor created salary requirements in 1938. The criteria for exemption were basically written in 1949 and haven't changed significantly.

"These regulations are so old that when they give examples in the regulations, they still talk about gang leaders and straw bosses and terms we don't use any more," Boonin observed.

He said it's a common misconception that all people who are paid a salary are exempt from overtime pay. Generally, a person has to be paid a salary and fall into one of the job categories as defined by the statute, he explained.

There is a complex long test and a simple short test that are used to determine which employees in each of those categories are exempt, based on weekly salary level.

Under the long standard test, the current salary threshold for executive and administrative employees is $155 per week and for professionals $170 per week. The short test applies to employees in the executive, administrative and professional categories who make $250 per week.

"These numbers haven't been changed since 1975," Boonin pointed out. "If you just multiply the minimum wage by 40 hours you get $206 a week, so obviously there's something really lagging."

The new proposal would raise the weekly salary limit to $425, so an employee has to be paid at least $22,100 a year to satisfy the salary test for the exemption.

"That's a significant change," Boonin said. "The Department of Labor predicts that nearly 1.3 million people who are currently aimed to be exempt will now be eligible for overtime pay. They think those will be largely in the retail industries and in the rural South.

"There's a question right now because they've added as part of the requirement that the 'professional' has to do office or non-manual work. Does that mean scientists, archeologists and field engineers are not going to be exempt anymore? That's one of the things we think is, hopefully, going to be resolved in the final version of the regulations."

The proposal was announced March 31, and businesses, employee groups and unions had until June 20 to provide comment.

The Department of Labor received about 80,000 comments, Boonin noted, and he expects to have the final regulations published during the first quarter of next year. The new regulations would apply to virtually all employers engaged in interstate commerce.

"Potentially, according to the unions, a lot of people will be losing their exempt status," Boonin said. "I don't believe that's likely to be the case. I think the new proposed regulations have made some of the definitions clearer."

He said most people, particularly employers, would say the changes are long overdue. He imagines a lot of employers were probably hoping the salary requirement would be eliminated all together.

"But the Department of Labor is going to keep the salary requirement in there and increase it. So they're going to require employers to pay employees more in order for them to be exempt."

New regulations would also make it easier for an employer to declare as exempt an employee making $65,000 or more a year.

Over the past decade there have been class action suits all over the country fighting over whether or not certain employee classifications are exempt, Boonin observed.  

"Most people making $65,000 a year would have been exempt anyway. The Department of Labor is just saying it's going to be easier to prove it. We're not going to have as many lawsuits fighting about people making that kind of money.

"The unions and the employee groups are appalled by that because they think everyone should be paid overtime, and employers think there has to come a point where that shouldn't be required."

One major area proposed that's subject to change is the salary level, he said, because that's the area that will increase the number of people eligible to be paid overtime and decrease the number of people that will be exempt.

The Department of Labor is making two other changes to the salary rules. One deals with what kind of deductions an employee can take from his salary and still be exempt, Boonin said.

Under another rule change, an employee would become eligible for overtime if his employer makes some improper deductions from his salary. The new rule would allow the employer to correct the mistake without losing the exemption. That change would eliminate a lot of litigation if it goes through, Boonin added.

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