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Bar News - March 19, 2004 Changes in Overtime Rules to Alter Employment Landscape By: Christopher Vrountas Revising New Deal-Era FLSA Editor's Note: The U.S. Department of Labor expects to issue new rules by March 31 that will substantially redefine what workers may be entitled to overtime pay under the Fair Labor Standards Act. Not since passage of the New Deal has the U.S. government sought to change the classification of protected workers so broadly. Regardless of one's views on whether the proposed changes will be helpful or fair, nearly all employers will be affected and accordingly will need to understand and be prepared to comply with the new rules in as little as 90 days. Although the final version of the rules has not yet been released, this article provides background on the FLSA and elaborates how the new rules are expected to change for each employee classification under the Act. THE U.S. SENATE passed the omnibus appropriations bill on January 22, 2004 that authorized the Department of Labor to promulgate new rules for exempt classification of workers under the Fair Labor Standards Act (FLSA). These new rules will be the most significant changes to the regulations concerning the exempt status of workers under the FLSA in over 50 years. The final rules will likely be issued by the end of March and will provide a 60-day grace period for compliance. Among other things, the new rules will establish a new minimum salary of $22,100 (or $425/week) to establish exempt status, and would revise the definitions of exempt workers under the "Executive," "Administrative," "Professional," and "Outside Salesperson" exemptions. An additional exemption for "highly compensated employees" will be added, referring to those who perform some exempt worker functions and who make at least $65,000 annually. How Did We Get Here? Congress passed the FLSA in 1938, requiring covered employers to pay workers at least a federal minimum and overtime premium of time-and-one-half of the regular rate of pay for all hours worked over 40 in a work week. Although the FLSA expressly exempted "Executive," "Administrative," "Professional" or "Outside Sales" employees from its protections, Congress left to the DOL the task of defining the exempt categories of workers. To that end, the DOL first issued regulations under the FLSA in 1938, but there have been no modifications to the regulations defining the kind of work workers must perform to qualify as being "exempt" from the FLSA's protections since 1949. Much has changed since 1949. The country has moved from a manufacturing based economy to a service and information based economy, and the nature of work in America has necessarily been transformed with the move. As a result, many more people work in "office" and "non-manual" jobs, which were formerly significant distinctions when determining whether an employee might be "exempt" from the FLSA's provisions. The existing regulations implementing the FLSA have not changed with the economy and, accordingly, now offer little help for employers in determining who indeed should be exempt. Not until 1999 did the General Accounting Office identify the FLSA for significant regulatory overhaul, and not until this year will the changes become law. Why Are Some Workers Exempt? There are certain workers who, because of their education, skill and level of pay, can more effectively bargain for themselves and manage their economic destiny. Accordingly, the exemptions to the FLSA were originally premised on the belief that exempt workers typically earned higher salaries (certainly above the minimum wage) and other privileges and benefits setting them apart from workers entitled to overtime pay. The exemptions also looked to employees whose work was difficult to standardize to any time frame and which could not easily be spread to other workers after 40 hours per week. The DOL's changes are designed to identify such workers in the 21st century workplace. Tests Change to Determine Exempt Status Under the current regulations for FLSA, there is a "long" duties' test for workers who make over $155 a week and a "short" duties' test for workers who make over $250 per week to determine which workers may be exempt from the FLSA's pay provisions. Neither test refers to a reasonable salary level, and the long test's extremely low wage level has rendered it nearly useless. The new scheme creates a single "standard" test and raises the determining wage to $425 per week. Here is a brief review of the current exemption tests and how they are expected to change in the coming weeks: Executive Employees The new "standard" duties' test would combine certain elements of the "long" and "short" tests, raise the exempt wage to $425 per week, and eliminate other requirements that now exist in the regulations. Specifically, the proposed new "standard" test would require that an exempt "Executive" employee: (1) have a primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; (2) customarily and regularly direct the work of two or more other employees; and (3) have the authority to hire or fire other employees or have particular weight given to suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees. Perhaps most helpful for employers, the new regulations would eliminate the percentage limitations on time spent on non-exempt work and standardize the "hiring/firing" component for all "Executive" employees who might be exempt. These changes simplify record keeping and streamline the analysis for employers to follow and narrow the scope of who may be considered exempt under this classification. Administrative Employees The administrative exemption has been the most challenging of the statutory exemptions to define and delimit. An exempt "Administrative" employee under the current "short" test must be paid at least $250 per week, have a primary duty of office or non-manual work directly related to management policies or general business operations of the employer or the employer's customers, and perform work requiring the exercise of discretion and independent judgment. The "long" test contains the same elements, and it adds the requirement that the employee "regularly assist" another "exempt" worker or that he or she perform work involving specialized or technical knowledge. It also requires such an employee not to perform non-exempt work for more than 20 percent of the time (40 percent if in restaurant or re tail). Although the current regulations contain plenty of terms that are difficult to apply, the "discretion and independent judgment" requirement in particular has become increasingly problematic in the 21st century workplace. The proposed new regulations would retain the requirement from the current regulations that exempt "Administrative" employees have a "primary duty" of "performing office or non-manual work related to the management or general business operations of the employer or the employer's customers." Eliminated are the percentage limitation on non-exempt work and the requirement that the employee assist another exempt worker or perform "specialized technical work." New rules would also replace the "discretion and independent judgment" requirement with a new standard that the employee hold "a position of responsibility" with the employer. For an employee to hold a "position of responsibility" under the new regulations, he or she must either (1) perform work of substantial importance, or (2) employ a high level of skill or training. Here is where the rubber meets the road. The concept of "work of substantial importance" could be used to expand the scope of this exemption beyond what many proponents expect. The DOL asserts that the concept has been in the interpretive regulations since 1950 as a factor for determining whether a worker is an exempt administrative employee. The proposed regulations would include a newly revised list illustrating the types of activities that shall generally be considered of "substantial importance" for purposes of the exemption, including: formulating or interpreting management policies; providing consultation and expert advice to management; making or recommending decisions that have a substantial impact on business operations or finances; analyzing and recommending changes to operating practices; planning long or short-term business objectives; analyzing data, drawing conclusions and recommending changes; and handling complaints, arbitrating disputes or resolving grievances. The new regulations would also better describe the primary duty requirement of "performing office or non-manual work related to the management or general business operations" by providing an illustrative list of the types of work areas that meet this requirement, including tax, finance, accounting, auditing, quality control, purchasing, procurement, advertising, marketing, research, safety and health, personnel management, human resources, employee benefits, labor relations, public relations, government relations and similar activities. Notwithstanding the attempt to provide a streamlined standard test and more specific and updated lists, the new rules do not clarify matters. Many labor groups have expressed concern that the new test will deprive many workers of the ability to earn overtime pay, effectively cutting wages for many workers. Professional Employees The new proposed standard test retains the primary duty requirement that "Professional" workers must perform work requiring knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. However, the test will now include knowledge and skill obtained through on-the-job experience. This new test focuses on the knowledge of the employee and how that knowledge is used in every day work, not on the educational path followed to obtain that knowledge. Workers who have obtained their specialized knowledge "on the job" including information technology (IT) workers, engineers, computer "help desk" personnel, will become exempt, as well as certain veterans who learn specialized skills in the service rather than in a degree program. The new standard reflects the 21st century fact that many "knowledge workers" acquire specialized learning and skills from experience as well as from a formal course of study. Outside Sales Employees An "Outside Sales" employee who is customarily and regularly engaged away from the employer's places of business making sales or obtaining orders or contracts for services or use of facilities, and who does not exceed a 20 percent tolerance per work week performing duties unrelated to his or her own outside sales or solicitations, is exempt from the FLSA's provisions. There are currently no salary or fee requirements for outside sales employees. The DOL's proposed new regulations contain a "primary duty" concept similar to the other exemptions, and eliminate the 20 percent restriction on nonexempt work by outside sales employees. By eliminating this percentage limitation, the DOL seeks to avoid any necessity that the employer track hours of outside sales employees. This should provide a consistent approach between this exemption and the exemptions for executive, administrative and professional employees. Otherwise, the essential elements required for this exemption would continue. Special Rule for Highly Compensated Employees The proposed regulations also include a special, streamlined rule for employees paid $65,000 or more annually, counting base salary, commissions, non-discretionary bonuses and other non-discretionary compensation. The Labor Department chose this salary level as it constitutes the 80th percentile (top 20 percent) salary level for workers in the U.S. Those paid $65,000 or more annually and performing non-manual work would be exempt if they have an identifiable executive, administrative or professional function as described in the standard duties' tests. These highly compensated employees would not have to meet all the elements of the standard duties' test to qualify for the exemption. For example, an employee who supervises two workers but does not participate in the hiring or termination decisions in the company would still be exempt because the employee has a function that is identifiable as an executive function. This change will have the greatest impact in high-cost/high salary areas of the country such as New York, Boston and Los Angeles. Many secretaries at the largest law firms in Boston, for example, make more than $65,000. The relaxation of the duties' requirements for such workers could add greatly to the number of exempt workers. Estimates of Impact Differ Widely Although everyone agrees that many paid hourly workers will become exempt employees, estimates of just how many will be impacted differ widely. The DOL estimates that approximately 644,000 hourly workers who have been receiving overtime pay will become exempt. The Economic Policy Institute, however, estimates that the changes will result in some 8 million workers losing their eligibility for overtime pay. The EPI argues that the DOL's analysis suffers from the fatal flaw of only counting workers who have actually been paid overtime as affected workers, rather than counting all currently non-exempt workers. Labor Secretary Elaine Chao last month testified to a House committee that such large estimates of workers losing overtime pay were "simply not true." Indeed, she said, raising the salary level to determine exempt status will "increase overtime" eligibility for 1.3 million workers. Secretary Chao has expressly rejected assertions that nurses, firefighters, and others could be denied overtime under the proposed changes. While her statements may be comforting to some, they certainly evidence a lack of the purported clarity that the DOL has argued the new regulations would bring. Conclusion Whether the new regulations truly resolve old problems or simply create new ones remains to be seen. Certainly, increasing the "salary" component of the various exemption tests was long overdue. Redefining exempt job functions, particularly for "administrative" employees may more accurately reflect the nature of work in the 21st century. But such revisions will likely generate significant conflict at the margins of those definitions and inevitably lead to litigation. Christopher Vrountas practices with the Manchester law firm of Nelson, Kinder, Mousseau & Saturley. Contact him at cvrountas@nkms.com.
FLSA CURRENT, PROPOSED DUTIES' TESTS Executive Employees
Administrative Employees
Learned Professional Employees
Outside Sales Employees
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