New Overtime Rules Debut Today

August 20, 2004
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GRAND RAPIDS — New regulations covering white-collar exemptions from the overtime pay rules of the Fair Labor Standards Act are effective as of today, Aug. 23.

According to the U.S. Department of Labor (DOL), the new rules strengthen overtime rights for 6.7 million American workers, including 1.3 million low-wage workers who were denied overtime under the old rules.

The DOL also estimates 107,000 workers that were previously nonexempt but earn $100,000 annually will be exempt under the new rules.

The new regulations are intended to simplify and streamline overtime rules, in part, to stem the flood of lawsuits filed against employers by employees who claim they are due overtime pay.

Overtime calculations and eligibility issues have been the greatest growth area for class-action lawsuits in the last few years, according to the Michigan Chamber of Commerce. In fact, wage and hour class actions have tripled since 1997.

The Michigan chamber estimates employers will be responsible for an additional $375 million in overtime this year. Enforcement began today and there is no grace period.

The DOL has talked about changing the regulations for 20 years and hasn’t changed them for 50 years, pointed out Robert Boonin, a labor and employment attorney and shareholder in Butzel Long. The regulations were out of date and the salary level was too low, he said, adding that the flood of litigation was the final impetus.

Although the new regulations are not as drastic as originally proposed, there are some significant changes that employers need to scrutinize, including safe harbor provisions, according to Elizabeth McIntyre, who specializes in labor and employment law at Miller, Johnson, Snell & Cummiskey.

The new law increases the minimum salary threshold for employees eligible for overtime pay from $8,060 per year, or $155 per week, to $23,660 a year, or $455 per week, and that’s probably the most significant change, McIntyre said.

As under the old regulations, most professional, executive and administrative employees and outside sales employees are exempt from overtime pay requirements.

Employees are classified as exempt from overtime pay if they satisfy three tests — the salary level test, the salary basis test and the duties test. Employees are exempt if they earn more than $455 a week, are guaranteed a predetermined amount of compensation each pay period and perform a specified type of duties, as described in the rules.

Boonin said the duties tests are similar to the old ones in many respects. He believes the DOL tried to keep them close to the standards everyone is used to, but there are a few exceptions.

The “professional” exemption applies to “learned” and “creative” professionals whose primary duty is the performance of work that requires advanced knowledge in a field of science or learning.

Executive employees are defined as those whose primary responsibilities are to manage a whole company, or a department or subdivision, and direct the work of two or more full-time employees. A new requirement in this category is the ability to hire or fire or effectively recommend hiring or firing, McIntyre explained.

Administrative employees are defined as those whose primary duty is non-manual work related to management or general business operations. Now, to qualify as “administrative,” the job requires “consistent exercise of discretion and independent judgment” with regard to matters of significance in the performance of one’s duties.

“We don’t know exactly what that means,” Boonin said.

Both he and McIntyre believe the administrative duties test will be the most confusing of the tests.

“The Department of Labor will tell you that the duties tests are really simply a clarification of existing law to make it easier to understand,” McIntyre said. “Along political lines, you’ll get a different view; some will say they’re more expansive and some will say they’re more restrictive. Time will tell.”

Boonin observed that some of the administrative employees who people have assumed were exempt will not be exempt under the new regulations.

“The employees who are in the lower level administrative ranks arguably were more easily classified as exempt under the former regs than they will be under the new regs, and I think there’s going to be a rude awakening for some folks.”

McIntyre thinks some issues that were previously topics of litigation have been clarified and won’t be much of an issue anymore.

“There will continue to be confusion, but it will be confusion over different things. There will continue to be litigation.”

She said that among her clientele, some have chosen to give the individual a raise to meet the minimum salary and the raise is consistent with what they would have had to pay them had they paid them overtime. So for them, it really isn’t going to be much of a change.

“For some industries, that raise to $23,600 absolutely means nothing because employees that get an hourly wage already earn that much.”

But it will likely make a difference in some sectors, largely the retail sector, McIntyre said. Retail managers and service managers in suburban areas probably already earn the threshold amount, she said, but the higher threshold amount might mean more to people who hold the same kinds of jobs in the rural areas and the South.

Many retail and food service managers are among the 1.3 million that are no longer exempt from overtime pay under the new regulations, Boonin added.

The new regulations also create a safe harbor for employers to protect themselves from damages should they make an improper deduction, particularly in docking a salaried employee’s pay, McIntyre pointed out.

“If they make particular changes to their employment policies, they can protect themselves from penalties and huge damage judgments if they make those policy changes and comply with them.”

Under the old rules, a single unlawful deduction could result in the loss of exempt status for all employees within the same job classification, McIntyre explained. Under the new rules, isolated or inadvertent deductions will not result in a loss of exemption for any employees, if the employer reimburses the employee for the improper deduction, she said.

If employers adopt and adhere to a policy, it will reduce their exposure to litigation significantly, McIntyre and Boonin stressed.

“They have to implement a new, very specific policy. A lot of employers don’t realize that yet,” Boonin remarked. He added that in order to take advantage of the safe harbor protection, the policy has to include a mechanism that provides employees the means to complain about errors in their pay.

Both Boonin and McIntyre recommend that employers:

  • Audit each employee’s exempt status. Review job descriptions to ensure they accurately reflect the jobs performed and the skills necessary to perform the job. Determine whether or not every employee that has been considered exempt still falls within that definition under the duties test and salary test.

  • Establish a safe harbor policy.

  • Make sure overtime for nonexempt employees has been accurately calculated.    

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