United States: Wage and Hour Laws to Get Long Over-due Facelift

On March 31, 2003, the Department of Labor (DOL) published its proposed regulations that would modify the definitions of employees who are categorized as exempt from minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA). There is a 90-day public comment period before the Department of Labor finalizes these regulations.

The FLSA directly affects nearly every business in the U.S. and is probably one of the least known and misunderstood laws that regulate employers. Let’s face it – there’s nothing particularly sexy about the wage and hour rules. Ignoring these rules, however, can create class action liability, quickly resulting in staggering exposure for your company. But these changes are intended to help employers through this regulatory maze, and better reflect the realities of the current workplace.

The proposal includes increasing the minimum salary to qualify for an exempt status from $155 per week to $425 per week or $22,100 per year. With the increase in the minimum salary, the "duties" test would focus only on the employee’s primary duty. It eliminates the "long test" requirement that prohibited exempt employees from spending more than 20% of their time on non-exempt duties. So long as the exempt employee receives the new minimum salary and spends at least 51% of his or her time on the primary exempt duties of the job, he or she is entitled to the exemption.

So what are the issues, and how can you keep your company out of trouble? One of the most common FLSA problems companies face is properly determining what positions are "exempt." This classification is important because it means that the position is "exempt" from the obligation to pay overtime, which is 1.5 times the regular rate of pay, when an employee works more than 40 hours in a workweek. If misclassified, however, everyone in that position – company-wide – may be entitled to overtime for the last two or even three years. For employees who are already well-compensated, that exposure adds up fast.

Remember that in order for a position to be considered exempt, the employee has to perform certain kinds of duties AND be paid "on a salary basis." Unfortunately, too many employers overlook the "duties" test, and jump right to the salary in the mistaken belief that simply paying a salary makes the position magically exempt. What’s more, even if a position is otherwise exempt, the employer can lose the exemption by improperly docking the guaranteed salary for things like partial day absences and (under the current regulations) disciplinary, unpaid suspensions of less than a full workweek.

These proposed regulations are also intended to simplify the "duties" tests for the so-called white collar exemptions -- Executive, Administrative and Professional classifications. The simpler tests would focus only on the employee’s primary duty, eliminating the "long test" requirements that prohibited exempt employees from spending more than 20% of their time on non-exempt duties. So long as the employee receives the new minimum salary and spends at least 51% of the time on the primary duties of the particular exemption, he or she would be entitled to the exemption.

Further fine-tuning of the "Administrative" exemption would remove the requirement that the employee "customarily and regularly exercises discretion and independent judgment" and requires instead that the employee holds "a position of responsibility" with the employer – meaning that he or she "performs work of substantial importance," or whose work "requires a high level of skill or training." "Professional" employees would no longer be required to have a college degree if they acquire equivalent advanced knowledge through a combination of intellectual instruction and work experience.

The proposed regulations would create a new "highly compensated employee" exemption for an employee who performs office or non-manual work and is guaranteed total annual compensation of at least $65,000 if he or she performs any one or more exempt duties of an Executive, Administrative or Professional employee. Base salary, commissions, non-discretionary bonuses and other non-discretionary compensation all are credited toward the minimum $65,000 per year guaranteed compensation.

Also, for the first time in its 65-year history, the new proposed regulations would permit deductions from an exempt employee’s salary for unpaid suspensions of at least a full-day for infractions of workplace conduct rules such as sexual harassment or work place violence without jeopardizing the individual’s exempt status.

The final regulations are expected by the end of 2003 or the beginning of 2004. These regulatory changes provide a great opportunity to audit your positions to ensure that they are classified properly, and to examine your pay procedures to make sure you are not inadvertently jeopardizing the exempt status of your employees by making improper deductions from salary.

One caveat: when you conduct that audit consider getting your lawyers involved. Why? Because these are complex regulations that will now be in flux, and you want to make sure you are getting the expertise you need to make these high-stakes determinations. You are also better served if your conclusions are protected by an attorney-client privilege. What you don’t want is to have your well-intentioned self-analysis laid open for the DOL or some employee’s lawyer to use against you. But a wise employer finds these problems itself and corrects them before the DOL or some employee advocate comes knocking at your door.