New FLSA Rules Affect OT Pay For Employees

from Maine Townsman, June 2004)
By Antoinette Mancusi, Technical Advisor, MMA

The Fair Labor Standards Act (FLSA) requires that most employees are paid at least the Federal minimum wage for all hours worked and overtime (OT) pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek — unless an exception or “exemption” to the OT rules exists. In April of this year, after more than two decades of the FLSA, the federal Department of Labor (DOL) published new FLSA rules. The purpose of these amendments was to update antiquated FLSA exemptions and criteria and to simplify the standards used in determining exempt status.

Under what the DOL is calling the new “FairPay” rules, workers earning less than $23,660 per year or $455 per week are guaranteed overtime protection. According to DOL, “this will strengthen overtime rights for 6.7 million American workers, including 1.3 million low wage workers who were denied overtime under the old rules.”

Many human resource (HR) representatives and organizations have an opposing view. They believe the new OT rules will be prohibitively expensive for employers who find themselves with several new non-exempt workers as a result of the changes.

Others, including Rep. George Miller, D-California, have challenged the new FLSA rules generally disagreeing that more workers would be eligible for overtime. Rep. Miller expressed concern that, “the regulations extend overtime to low-income workers but threaten overtime pay to others.” Revisions to how workers’ exempt status is determined could mean that workers earning between $23,660 and $100,000 annually may lose their overtime pay protection, he said.

It is too early to predict which way the pendulum will swing — only time will tell who is correct.

Generally, federal rulemaking becomes effective 120 days after publication in the Federal Register; however, with the new FLSA rules there may be a “hold-up.” Since the rules’ publication date was April 23, 2004 the new rules are supposed to take effect in August of 2004. Because of what observers are calling a “rancorous” debate over the Labor Department’s new FLSA regulations and a Senate vote blocking the new white-collar regulations under the FLSA, the rules’ fate remains unclear.

DOL is telling HR professionals and employers to “continue to operate on the assumption that the revised overtime rules will go into effect on August 23, 2004.” According to the Society for Human Resource Management (SHRM), Victoria A. Lipnic, DOL’s assistant secretary for employment standards stated, “I would encourage you not to take the vote in the Senate (May 4) as a sign that these regulations are not going to go forward . . . We are not throwing in the towel by any means. Make sure that you are planning to be in compliance by the end of August.”

Early in May, the Senate voted in favor of a proposal made by Sen. Tom Harkin, D-Iowa (amendment to S. 1637 — an import tax bill), which blocked the new regulations application to any worker who is currently eligible for time-and-a-half pay. The Harkin proposal is now slated for a vote in the House of Representatives. The Harkin amendment could create a hardship for HR professionals as it would require that employers administer two different tests for determining a worker’s overtime pay status. Employees performing the same job duties could in theory be treated differently by virtue of their “hire dates” (pre and post August 2004). Employees hired prior to the August 2004 revisions would fall under the previous rules while employees hired after the August 2004 amendment would fall under the new OT rules. If the Harkin proposal passes in the House of Representatives, a strong possibility exists that President Bush would veto it.

As of the date of this writing, the fate of the new overtime pay amendments to S. 1637 remains unclear.

Should municipal employers ignore the DOL’s directions and do nothing for now, or are there things that all employers should be doing in case the revisions pass in the House and the White House fails to veto them? Despite the ambiguity surrounding the amendments’ ultimate outcome, there are indeed a few things that reticent employers can and should be doing in the event the DOL’s amendments take effect in August.

The first thing is to isolate those “exempt” employees with salaries at or under $23,660 a year or $455 a week. A red flag should go up next to the names of employees that fit this salary classification. Under the revised rules, employees making this amount or lower can not be classified as exempt, so prepare to make these employees non-exempt. Importantly, forget about the amounts of $155 and $250 and their respective long and short tests. The new rules utilize the new $23,660 salary test exclusively.

Second, in addition to this new salary test, the new FLSA amendments revise duty tests. Duty tests are nothing new to FLSA analysis. So for employers that have been conscientious about reviewing job descriptions in the past, the only nuance will be the actual test now required for exempt employees earning above the new minimum salary range. (Remember, regardless of the job duties, if the salary criteria previously mentioned has not been met, the job description/duties will never suffice to make the employee exempt! See chart on page 24 for” Comparison of Salary Levels.” )

Third, the FLSA amendments provide employers with a “safe harbor” rule (see 29 CFR 541.603). Currently if an employer makes improper deductions from salary, the employer loses the employee exemption if the facts demonstrate that the employer has a pattern and practice of not paying employees on a salary basis. Under this new rule, an employer will not lose the employee exemption for any employees unless the employer willfully violates the policy by continuing the improper deductions after receiving employee complaints. In order to utilize the “safe harbor” rule, the employer must have a policy in effect.

Sec. 541.603 “Effect of improper deductions from salary” provides:

d) If an employer has a clearly communicated policy that prohibits the improper pay deductions specified in Sec. 541.602(a) and includes a complaint mechanism, reimburses employees for any improper deductions and makes a good faith commitment to comply in the future, such employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. If an employer fails to reimburse employees for any improper deductions or continues to make improper deductions after receiving employee complaints, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions. The best evidence of a clearly communicated policy is a written policy that was distributed to employees prior to the improper pay deductions by, for example, providing a copy of the policy to employees at the time of hire, publishing the policy in an employee handbook or publishing the policy on the employer’s Intranet.

A welcome change to the FLSA regulations includes a provision which will allow employers to reduce the pay of exempt employees for disciplinary reasons, i.e., “for penalties imposed in good faith for infractions of safety rules of major significance; or for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions.”

This new provision will allow employers to reduce an exempt employee’s wages by increments of a day or more whereas the previous regulations only permitted “docking” or reductions at weekly intervals so as not to interfere with the salary basis requirements. Deductions from pay are also still permissible when an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability; for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness; to offset amounts employees receive as jury or witness fees, or for military pay. Similarly, an employer is not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.

Of particular relevance to municipal employers is a new provision which provides that OT exemptions do not apply to

“police officers, fire fighters, paramedics, emergency medical technicians (EMTs), and other first responders regardless of rank or pay level, who perform work such as preventing, controlling or extinguishing fires of any type; rescuing fire, crime or accident victims; preventing or detecting crimes; conducting investigations or inspections for violations of law; performing surveillance; pursuing, restraining and apprehending suspects; detaining or supervising suspected and convicted criminals, including those on probation or parole; interviewing witnesses; interrogating and fingerprinting suspects; preparing investigative reports; or other similar work.” (See 29 CFR § 541.3(b))

Most courts have traditionally held that such workers were generally non-exempt because they typically did not perform the duties required for the executive or administrative exemption. Similarly, federal courts have held that police officers, paramedics, EMTs, and similar employees were not exempt professionals because they did not perform work requiring knowledge of an advanced type in a “field of science or learning” requiring knowledge “customarily acquired by a prolonged course of specialized intellectual instruction” as required under both the current and final rules.

However, the Department of Labor currently notes that, “some police officers, firefighters, paramedics and EMTs treated as exempt executives under the current regulations may be entitled to overtime under the final rule because of the additional requirement in the standard duties test not found in the current short test that an exempt executive must have the authority to 'hire or fire' other employees or make recommendations given particular weight on hiring, firing, advancement, promotion or other change of status. Therefore, the Department concluded that the executive duties tests for police officers, fire fighters, paramedics, EMTs, or other first responders in the final rule are more stringent than the current short tests and some such workers may actually gain overtime protection.”

Because of the ambiguity surrounding the effective date of the regulations and a few substantive details which must still be voted on by the House, employers are probably not in a rush to dedicate too much time performing research on compliance obligations. It is good to know that the Employment Standards Administration of the Department of Labor has done a bang-up job at providing HR professionals and employers with much information and training on its web site http://www.dol.gov/esa.

Municipal officials are encouraged to navigate this website for FLSA compliance information and training: Favorites on the site include the “FairPay” video training series and a host of succinct fact sheets.