United States: U.S. Labor Department’s New Overtime Rules’ Effect On Employers

On April 20, 2004, the U.S. Department of Labor (DOL) issued the highly anticipated final revised overtime regulations, which will take effect in August 2004. In light of these new regulations, prudent employers should take this opportunity to review their workforce to assure that employees are properly classified as either exempt or non-exempt from overtime under the Fair Labor Standards Act (FLSA).

Under FLSA, all non-exempt employees are entitled to overtime if they work more than 40 hours a week. However, employers do not have to pay overtime to exempt employees—employees who qualify for one of the many exemptions detailed in the regulations. Most employees who qualify as exempt fall into one of three major exempt categories: administrative, executive or professional employees. Under both the old and the revised regulations, in order to determine whether an employee should be classified as exempt, an employer must apply two tests, duties tests and salary tests, as set forth in the regulations.

Many of the major changes in the regulations are focused around the salary tests. For example, under the old regulations, an employee could qualify as exempt from receiving overtime if he or she earned at least $155 per week, or $8,060 per year. Under the new regulations, the minimum salary an employee must make to qualify as exempt is $455 per week, or $23,660 per year. For many employers, this change to the minimum salary will result in an increase in the number of employees who must be classified as non-exempt. Another significant change in the regulations is the new automatic exemption from overtime for employees earning $100,000 or more per year, provided that their primary duty involves office or non-manual work and they regularly perform at least one exempt duty as defined in the rules. Unlike the new minimum salary requirement, which increases the universe of employees covered by the overtime requirements, the addition of a $100,000 salary cap narrows the universe of employees covered by the overtime requirements. In fact, many will find that the adjustments to the salary tests mirror common expectations that low-wage earners are more likely to be entitled to overtime than high-wage earners, such as those earning a salary of $100,000 or more per year.

The new regulations also make significant changes to the duties tests. For example, one of the requirements under the old rules for the administrative exemption was that the employee "customarily and regularly" exercise discretion and independent judgment. Over the years, there has been a great deal of litigation attempting to interpret this phrase. In an effort to clarify the duties element of the administrative employee exemption, the DOL has revised the test to require that an exempt administrative employee’s primary duty include the exercise of "discretion and independent judgment with respect to matters of significance." (emphasis added). This change is likely to narrow the universe of administrative employees who can be properly classified as exempt.

A similar narrowing in the scope of employees who can properly be classified as exempt flows from the revisions to the duties test for executive employees. Previously, exempt executives were defined as those whose primary duties involve the management of the enterprise or a regular department or subdivision and who customarily and regularly direct the work of two or more employees. Under the new regulations, exempt professionals must also have the authority to hire or fire other employees or to have their recommendations regarding hiring, firing, promotion or other status changes given particular weight. Like the change to the administrative test, this change is likely to result in more employees being classified as non-exempt.

On the other hand, some of the changes to the duties tests expand the universe of employees who may properly be classified as exempt. For example, the revised regulations provide exempt status for individuals who function as team leaders, working supervisors and relief supervisors. Under the old regulations, the status of these employees, whose duties include both supervising and some non-exempt work similar to that performed by their subordinates, has been nebulous. In the new regulations, the DOL has specifically stated that such employees may be classified as exempt if they oversee a "major project," such as "purchasing, selling, or closing all or part of a business, negotiating a real estate transaction or a collective bargaining agreement, or designing and implementing productivity." In light of this change, many formerly non-exempt employees may be re-classified as exempt.

Although a correct application of the new regulations will require an audit of employees’ classifications, employers should be motivated to undertake such an audit not only to avoid FLSA liability, but also because some of the changes will result in an increased number of exempt employees. For example, the proper application of the $100,000 salary cap and the team leader category could save employers on overtime pay and reduce administrative costs associated with non-exempt employees. It is critical that all employers evaluate their current job descriptions to ascertain the appropriate classification of all employees under the new regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.