United States: New Overtime Regulations Under Fair Labor Standards Act – A Trap For The Unwary

[Excerpt from Preamble to Final Regulations Rules Submitted by Department of Labor to Federal Register (April 23, 2004).]

After more than 50 years, the United States Department of Labor ("DOL") substantially revised the regulations governing overtime eligibility for "white collar" workers under the Fair Labor Standards Act ("FLSA"). This legislation, known as the "FairPay Initiative," is meant to streamline the tests for overtime eligibility and make them "easier to decipher." In March, 2003, the DOL first published proposed changes to the overtime regulations and after a public comment period in which the DOL received 75,280 comments, the Department published a final set of regulations, highlights of which are noted below.

Employers should understand that these new FLSA regulations do not preempt stricter state or local laws governing minimum wage and overtime requirements. Some states, primarily California, have adopted overtime laws which make larger numbers of employees eligible for overtime. Those stricter state laws remain unaffected by changes to the federal FLSA regulations.

The new regulations provide that employees earning less than $23,660 per year ($455 per week) are automatically entitled to overtime. The final rule increases the minimum salary level requirement for exempt employees by $300 per week (from $155 per week or $8,060 per year). While an increase in the minimum salary threshold is likely to boost the number of workers nationwide now entitled to overtime, the final revision of the salary level test does not affect California employers. In California, the law mandates that exempt employees receive at least two times the state minimum wage. Currently, at a minimum wage of $6.75 per hour, California employees who make less than $28,080 per year ($585 per week) already automatically qualify for overtime.

When the draft overtime regulations were published in March, 2003, the DOL proposed that workers who earn $65,000 a year or more on a salaried basis would be entitled to overtime if they met at least one of the executive, administrative or professional criteria. The final regulations create an exemption for highly compensated employees, but the DOL increased the minimum income threshold to $100,000. Under the new regulations, employees who mke more than $100,000 per year will be automatically considered exempt if they:

• are paid at least $455 per week;

• customarily or regularly perform at least one of the exempt duties or responsibilities of an executive, administrative or professional employee; and

• perform office or non-manual work

Thus, for example, if an employee makes at least $100,000 and directs the work of two or more employees, the employee qualifies as an exempt executive employee even if s/he does not meet any of the other requirements of the exempt executive duties test. California does not have a highly compensated employee test, and it is not known whether it would adopt such a test to be consistent with Federal law.

Employers should also note that manual laborers or other "blue collar" workers, who perform work involving repetitive operations with their hands, physical skill and energy, are "always entitled to overtime pay," no matter how highly paid they might be. By way of example, the DOL has identified the following types of jobs/positions to fall within this "blue collar" category: non-management production-line employees and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers.

Ordinarily, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available. For example, if an employee (who otherwise was exempt from overtime) violated a company policy or rule, such as one prohibiting sexual harassment, the employee could not be placed on leave without pay for a part of the workweek without jeopardizing the employee’s exempt status. The newly revised DOL regulations now permit a deduction from the employee’s salary for the time the employee was on leave without pay if the employee was on leave for one or more full days. Specifically, the DOL now permits deductions to be made "[f]or unpaid disciplinary suspensions of one or more full days imposed in good faith for violations of workplace conduct rules, such as sexual harassment or workplace violence." In the revised regulations, the DOL kept in place six other prior permissible deductions that will not trigger the loss of exempt status:

• If the employee is absent from work for one or more full days for personal reasons, other than sickness or disability;

• If the employee is absent for one or more full days for sickness or disability, as long as the deduction is made under a bona fide plan, policy or practice of providing compensation for loss of salary caused by sickness or disability;

• To offset any amounts the employee receives as jury fees, witness fees or military pay;

• As a penalty imposed in good faith for violations of "major" safety rules, including those designed to prevent serious danger in the workplace or to other employees;

• For time not worked during an employee’s initial or last week of employment; and

• For unpaid leave taken under the Family and Medical Leave Act.

In conformity with the proposed regulations, the final DOL regulations include a new "safe harbor" provision whereby exempt status may not be lost even where improper deductions are made by the employer. Examples of improper deductions include deductions for:

• partial-day absences for personal reasons, illness or disability;

• days that an employee attended jury duty; and

• days that the employer was closed for business.

The "safe harbor" provision is only available if the employer: (1) has clearly communicated the policy prohibiting improper pay deduction; (2) reimburses employees for improper deductions and; (3) makes a good faith commitment to comply in the future. In its submission to the Federal Register, the DOL explains that the loss of exempt status will occur if the "employer repeatedly and willfully violates [its policy prohibiting improper pay deductions] or continues to make improper deductions after receiving employee complaints."

It is unclear whether other jurisdictions in which an employee’s exempt status may be jeopardized for wage-related deductions will adopt a form of this "safe harbor" provision.

The DOL has also created a new exemption for individuals who own at least a 20% bona fide equity interest in a business enterprise. In addition to the requirement of a minimum percentage ownership stake, to qualify as exempt, an individual must actively be engaged in the management of the enterprise. There is no minimum salary requirement for this exemption to apply.

The new rules become effective on August 23, 2004. Employers have until that date to become compliant with the revised regulations. This employer alert is meant to highlight many of the new changes that will go into effect concerning the so-called "white collar" exemptions under the FLSA. For more information, or if you have any questions regarding specific regulations, please direct your questions to Mark Romeo* in Pillsbury Winthrop’s Orange County, California, office.

*Anusha Srinivasan, Esq. and Estela Diaz, Esq. of Pillsbury Winthrop’s San Francisco office contributed to this article.