Title: The New Overtime Regulations Under The Fair Labor Standards Act
1The New Overtime Regulations Under The Fair Labor
Standards Act
International Personnel Management
Association West Virginia Chapter
- September 30, 2004
- David B. Ritter
- Neal, Gerber Eisenberg LLP
- 2 North LaSalle Street
- Chicago, IL 60602
- (312) 269-8444
- dritter_at_ngelaw.com
2Todays Agenda
- Overview
- Why New Regulations?
- What Is the Status of These Regulations?
- What Is The Impact?
- What Has Changed?
- What Do We Do Now?
3Overview FLSA
- FLSA was enacted in 1938
- FLSA governs minimum wage and overtime
obligations of covered employers - Current Federal Minimum Wage 515/hr
- Note IL Min. Wage is 5.50/hr as of January 1,
2004 - Increases to 6.50/hour as of January 1, 2005
- Be aware of other state and local minimum wage
laws and living wage ordinances - Overtime for all hours worked in excess of 40 in
a work week, at time and one-half - Note Different overtime rules in many states
4Why New Regulations?
- Outdated No substantial changes since 1938
- Reduce costly and lengthy litigation
- Clear rules that are easier to understand and
enforce
5What Is The Status?
- Effective Date August 23, 2004, unless Congress
takes action - Congressional Review Act
- 60 days to block the regulations from being
implemented (by July 23, 2004)
6What Is The Status? (Cont.)
- Note state legislative activity
- Illustration Illinois Minimum Wage Act amended
(on April 2, 2004) to effectively maintain
overtime eligibility for employees who are
entitled to overtime under the old FLSA
regulations (except adopting new salary test)
7What Is The Status? (Cont.)
- Pending Congressional Amendments Legislative
action to severely limit application of new
regulations - Added ninety-nine specific categories of jobs
that cannot qualify for a white collar exemption - Nullify any provisions of the new regulations
that would deprive any worker of the right to
overtime if that worker would be so entitled
under the current regulations - Status is somewhat in a state of flux
8What Is The Status? (Cont.)
- At least 18 state laws must be considered before
overtime exemption determinations can be made - They are Alaska, Arkansas, California, Colorado,
Connecticut, Hawaii, Illinois, Kentucky,
Maryland, Minnesota, Montana, New Jersey, North
Dakota, Oregon, Pennsylvania, Washington, West
Virginia, and Wisconsin - Note that FLSA requires employers to abide by
more favorable state laws, but if new FLSA
regulations result in previously exempt employee
becoming non-exempt, the new regulations will
apply in Illinois. Creates two sets of laws
which must be juggled back and forth to make
proper determinations - Watch state law developments carefully
9What Is The Impact?
- Estimated that 1.3 million currently exempt white
collar salaried workers will gain OT protection - 107,000 workers who earn more than 100,000 per
year could lose OT protection from highly
compensated test - Estimated costs to employers 738.5 million,
related to reviewing the regulations and revising
OT policies, and conducting job reviews
10What Is The Impact? (Cont.)
- 375 million more per year paid in OT
- Reduce HR and legal costs for classifying workers
11What Has Changed?The White Collar Exemptions
- The FLSA provides an exemption from both minimum
wage and overtime pay for employees who are
employed as - Executive
- Administrative
- Professional or
- Outside Sales capacity
12Three Basic Tests for All Exemptions
- Salary Level Test
- Salary Basis Test
- Job Duties Test
13Salary Level Test 455/wk (or 23,660/year)
- OT is required if salary is less that this amount
14Highly Compensated Test
- This is something new
- Total annual compensation of at least 100,000
- At least 455 per week
- Performance of office or non-manual work
- Customary and regular performance of any one or
more of the exempt duties identified in the
standard tests for the executive, administrative
or professional exemptions - No overtime if meet this test
15Highly Compensated Test (Cont.)
- Total annual compensation includes
- Commissions
- Nondiscretionary bonuses
- Other nondiscretionary compensation earned during
a 52-week period
16Highly Compensated Test (Cont.)
- If an employees total annual compensation does
not equal 100,000 by the end of the year - The employer may, within one month after the end
of the year, make one final bridge payment to
reach the 100,000 level orExample 1 Employee
earns 80,000 base salary, and employer expects
employee to make 20,000 in commissions. Due to
poor sales, employee only makes 10,000 in
commissions - Employer may, within one month after the end of
the year, make a 10,000 payment to the employee
to preserve the exemption
17Highly Compensated Test (Cont.)
- The 100,000 may be pro-rated for employees who
do not work the full year - The employer may use any 52-week period as the
year (i.e., calendar, fiscal, anniversary)
18Highly Compensated Test (Cont.) Only Office or
Non-manual Work
- Highly compensated test not available for
- Non-management production line workers
- 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 - Other employees who perform work involving
repetitive operations with their hands, physical
skill and energy - List could be expanded by pending Congressional
amendments
19Highly Compensated Test (Cont.) Must Customarily
and Regularly Perform at Least One Exempt Duty
- Frequency must be greater than occasional but
which may be less than constant - Includes work normally and recurrently performed
every workweek - Does not include isolated or one-time tasks
20Salary Basis Test
21Salary Basis Test
- Regularly receives a predetermined amount of
compensation each set pay period - The compensation cannot be reduced because of
variations in the quality or quantity of the work
performed - General Rule --Must be paid the full salary for
any week in which the employee performs any work - Need not be paid for any workweek when no work is
performed
22Salary Basis Test (Cont.)Deductions From Salary
- No deduction for absences occasioned by the
employer or by the operating requirements of the
businesses - If the employee is ready, willing and able to
work, deductions may not be made for time when
work is not available
23Salary Basis Test (Cont.)Permitted Salary
Deductions
- Seven exceptions from the no pay-docking rule
- Absence from work for one or more full days for
personal reasons, other than sickness or
disability - Example If an employee is absent for one and
one-half days for personal reasons, the employer
can deduct only for the full-day absence
24Salary Basis Test (Cont.)Permitted Salary
Deductions
- Absence from work for one or more full days due
to sickness or disability if deductions made
under a bona fide plan, policy or practice of
providing wage replacement benefits for these
types of absencesExample If an employer has a
short-term disability plan providing salary
replacement for 12 weeks starting on the fourth
day of absence, the employer may make deductions
from pay for the three days of absence before the
employee qualifies for benefits under the plan
25Salary Basis Test (Cont.)Permitted Salary
Deductions
- 3. To offset any amounts received as payment for
jury fees, witness fees, or military pay - 4. Penalties imposed in good faith for violating
safety rules of major significance - 5. Unpaid disciplinary suspension of one or more
full days imposed in good faith for violations of
workplace conduct rules (must be pursuant to
written policy)
26Salary Basis Test (Cont.)Permitted Salary
Deductions
- 6. Proportionate part of an employees full
salary may be paid for time actually worked in
the first and last weeks of employment - 7. Unpaid leave taken pursuant to the Family and
Medical Leave Act
27Salary Basis Test (Cont.)Effect of Improper
Deductions
- An actual practice of making improper deductions
from salary will result in the loss of the
exemption - During the time period in which improper
deductions were made - For employees in the same job classifications
- Working for the same managers responsible for the
actual improper deductions
28Salary Basis Test (Cont.)Actual Practice of
Improper Deductions
- Factors to determine whether an actual practice
exists - The number of improper deductions, particularly
as compared to the number of employee infractions
warranting discipline - The time period during which the employer made
improper deductions - The number and geographic location of both the
employees whose salaries were improperly reduced
and the managers responsible - Whether the employer has a clearly communicated
policy permitting or prohibiting improper
deductions
29Salary Basis Test (Cont.)Effect of Improper
Deductions
- Manager A has docked the pay of Engineer A on
each of 12 days when Engineer A arrived late for
work during the last 3 months - Answer The Exemption could be lost for Engineer
A and Engineer B during that 3 months, but could
not be lost for the Chemist or Engineers C and D
30Salary Basis Test (Cont.)The Safe Harbor
- The exemption will not be lost if the employer
- Has a clearly communicated policy prohibiting
improper deductions, which includes a complaint
mechanism - Reimburses employees for any improper deductions
and - Makes a good faith commitment to comply in the
future
31Salary Basis Test (Cont.)The Safe Harbor
- Safe Harbor Exception Where the employer
willfully violates the policy by continuing to
make improper deductions after receiving employee
complaints - Make sure you have a written policy in place by
August 23, 2004, to take advantage of the Safe
Harbor if Necessary
32Salary Basis Test (Cont.)Clearly Communicated
Policy
- Policy should be written and distributed to
employees prior to the improper pay deductions
by - Providing a copy of the policy to employees at
the time of hire or - Publishing the policy in an employee handbook or
- Publishing the policy on the employers Intranet
site
33Salary Basis Test (Cont.)Hypotheticals
- Deduction for a partial-day absence to attend a
parent-teach conference? - Deduction of a day of pay because the employer
was closed due to inclement weather? - Deduction of three days of pay because the
employee was absent from work for jury duty? - Deduction for a two day absence due to a minor
illness?
34Salary Basis Test (Cont.)Hypotheticals (Cont.)
- Deduction for a two day absence due to a minor
illness from an employees accrued leave account? - Requiring exempt employees to keep track of and
record their hours worked? - Requiring exempt employees to work a specific
schedule? - Implementing bona fide, across-the-board schedule
changes?
35Job Duties TestExecutive Exemption
36Executive Exemption New Test
- Whose primary duty consists of the management of
the enterprise in which he is employed or of a
customarily recognized department or subdivision - Who customarily and regularly directs the work of
two or more other employees - Who has the authority to hire or fire other
employees or whose suggestions and
recommendations as to the hiring, firing,
advancement, promotion or any other change of
status of other employees are given particular
weight
37Executive Exemption (Cont.) Breakdown of
Executive Duties
Key Defined Terms
- Primary duty is management of the enterprise or
of a customarily recognized department or
subdivision - Customarily and regularly directs the work of two
or more other employees and - Authority to hire or fire other employees or
whose suggestions and recommendations as to
hiring, firing, advancement, promotion or other
change of status of other employees are given
particular weight
38Executive Exemption (Cont.) Primary Duty
- The principal, main, major or most important duty
that the employee performs - Factors to consider include, but are not limited
to - Relative importance of the exempt duties
- Amount of time spent performing exempt work
- Relative freedom from direct supervision and
- Relationship between the employees salary and
the wages paid to other employees for the same
kind of nonexempt work
39Executive Exemption (Cont.) Primary Duty (Cont.)
- Employees who spend more than 50 of their time
performing exempt work will generally satisfy the
primary duty requirement - However, the regulations do not require that
exempt employees spend more than 50 of time
performing exempt work, i.e., time is not
determinative
40Executive Exemption (Cont.) Management
Includes, but is not limited to
- Interviewing, selecting, and training employees
- Setting and adjusting pay and work hours
- Maintaining production or sales records
- Appraising employee productivity and efficiency
- Handling employee complaints and grievances
- Disciplining employees
- Planning and apportioning work among employees
41Executive Exemption (Cont.) Management (Cont.)
- Determining the techniques to be used the type
of materials, supplies, machinery, equipment or
tools to be used or the merchandise to be
bought, stocked and sold - Providing for the safety and security of
employees or property - Planning and controlling the budget
- Monitoring or implementing legal compliance
measures
42Executive Exemption (Cont.) Department or
Subdivision
- A customarily recognized department or
subdivision must have a permanent status and
continuing function
43Executive Exemption (Cont.) Department or
Subdivision (Cont.)
- Examples of customarily recognized departments or
subdivisions include
44Executive Exemption (Cont.) Customarily and
Regularly
- Greater than occasional but less than constant
- Includes work normally and recurrently performed
every workweek - Does not include isolated or one-time tasks
45Executive Exemption (Cont.) Two or More
Employees
- Two full-time employees or the equivalent
- Full-time generally means 40 hours per week
- The supervision of the same employees can be
distributed among two or more exempt executives,
but the hours worked by an employee cannot be
credited more than once
46Executive Exemption (Cont.) Illustration Two or
More
General Manager -YES
Assistant Manager - Yes
Half-time Employee
Half-time Employee
Half-time Employee
Full-time Employee
Half-time Employee
Half-time Employee
Half-time Employee
47Executive Exemption (Cont.) Staffing Does Not
Meet the Illustration Two or more
Full-time Employee
Full-time Employee
Full-time Employee
48Executive Exemption (Cont.) Particular Weight
- Factors include, but are not limited to
- Whether it is part of the employees job duties
to make suggestions and recommendations - The frequency with which suggestions and
recommendations are made or requested - The frequency with which the employees
suggestions and recommendations are relied upon
49Executive Exemption (Cont.) Particular Weight
(Cont.)
- Suggestions and recommendations may be reviewed
by a higher level manager - The exempt executive need not have authority to
make the ultimate decision - Making an occasional suggestion regarding a
change in status of a co-worker does not meet the
particular weight standard - Concurrent performance of exempt and nonexempt
work does not automatically disqualify an
employee from exemption
50Job Duties TestAdministrative Exemption
51Administrative Exemption (Cont.)
- Whose primary duty consists of the performance of
office or non-manual work directly related to
management policies or general business
operations of his employer or his employers
customers AND - Whose primary duty includes the exercise of
discretion and independent judgment with respect
to matters of significance
52Administrative Exemption (Cont.) Breakdown of
Administrative Duties
Key Defined Terms
- Whose primary duty is the performance of office
or non-manual work directly related to the
management or general business operations of the
employer or the employers customers and - Whose primary duty includes the exercise of
discretion and independent judgment with respect
to matters of significance
53Administrative Exemption (Cont.) Management or
General Business Operations
- Refers to the type of work performed by the
employee - Work must be directly related to assisting with
the running or servicing of the business
54Administrative Exemption (Cont.) Management or
General Business Operations (Cont.)
Includes, but not limited to, functional areas
such as
- Tax
- Finance
- Accounting
- Budgeting
- Auditing
- Insurance
- Quality Control
- Purchasing
- Procurement
- Advertising
- Marketing
- Research
- Safety and Health
- Human Resources
- Employee Benefits
- Labor Relations
- Public and Government Relations
- Legal and Regulatory Compliance
- Computer Network, Internet and Database
Administration
55Administrative Exemption (Cont.) Discretion and
Independent Judgment
- Generally involves the comparison and evaluation
of possible courses of conduct, and acting or
making a decision after the various possibilities
have been considered - Must be exercised with respect to matters of
significance, which refers to the level of
importance or consequence of the work performed - Decisions and recommendations may be reviewed at
a higher level and, upon occasion, revised or
reversed
56Administrative Exemption (Cont.) Discretion and
Independent Judgment (Cont.)
- Matters of significance? Factors include
- Whether the employee has authority to formulate,
affect, interpret, or implement management
policies or operating practices - Whether the employee carries out major
assignments in conducting the operations of the
business - Whether the employee performs work that affects
business operations to a substantial degree, even
if the employees assignments are related to
operation of a particular segment of the business
57Administrative Exemption (Cont.) Discretion and
Independent Judgment (Cont.)
- Whether the employee has authority to commit the
employer in matters that have significant
financial impact - Whether the employee has authority to waive or
deviate from established policies and procedures
without prior approval - Whether the employee has authority to negotiate
and bind the company on significant matters - Whether the employee provides consultation or
expert advice to management
58Administrative Exemption (Cont.) Discretion and
Independent Judgment (Cont.)
- Whether the employee is involved in planning
long- or short-term business objectives - Whether the employee investigates and resolves
matters of significance on behalf of management - Whether the employee represents the company in
handling complaints, arbitrating disputes or
resolving grievances
59Administrative Exemption (Cont.) Discretion and
Independent Judgment (Cont.)
- Discretion and independent judgment does not
include - Applying well-established techniques, procedures
or specific standards described in manuals or
other sources - Clerical or secretarial work
- Recording or tabulating data
- Performing mechanical, repetitive, recurrent or
routine work
60Administrative Exemption (Cont.) Discretion
and Independent Judgment (Cont.)
- Exempt employees may use manuals, guidelines or
other established procedures if they - contain or relate to highly technical,
scientific, legal, financial or other similarly
complex matters - that can be understood or interpreted only by
those with advanced or specialized knowledge or
skills - Employees are not exempt if they use manuals to
apply well-established techniques or procedures
within closely prescribed limits
61Administrative Exemption (Cont.)
Industry-Specific Examples Insurance Claims
Adjusters
- Exempt status depends on actual job duties
- May be exempt if duties include
- Interviewing insureds, witnesses and physicians
- Inspecting property damage
- Reviewing factual information to prepare damage
estimates - Evaluating and making recommendations regarding
coverage of claims - Determining liability and total value of a claim
- Negotiating settlements
- Making recommendations regarding litigation
62Administrative Exemption (Cont.)
Industry-Specific ExamplesFinancial Services
Employees
- May be exempt if duties include
- Collecting and analyzing information regarding
the customers income, assets, investments or
debts - Determining which financial products best meet
the customers needs and financial circumstances - Advising the customer regarding the advantages
and disadvantages of different financial products - Marketing, servicing or promoting the employers
financial products - An employee whose primary duty is selling
financial products does not qualify for the
administrative exemption
63Administrative Exemption (Cont.)
Industry-Specific Examples Human Resources
Employees
- Human resource managers who formulate, interpret
or implement employment policies generally meet
the administrative duties requirements - Personnel clerks who screen applicants to
obtain data regarding minimum qualifications and
fitness for employment generally are not exempt
administrative employees
64Administrative Exemption (Cont.) Other Exempt
Administrative Positions
- An employee who leads a team of other employees
assigned to complete major projects - Executive assistant or administrative assistant
to a business owner or senior executive of a
large business who has been delegated authority
regarding matters of significance - Management consultants who study the operations
of a business and propose changes in organization
65Administrative Exemption (Cont.) Non-Qualifying
Positions
- Ordinary inspection work involving
well-established techniques and procedures - Examiners and graders who perform work involving
comparison of products with established standards - Comparison shoppers who merely report the prices
at a competitors store
66Job Duties TestProfessional Exemption
67Professional Exemption
- Whose primary duty consists of the performance
of work requiring knowledge of an advanced type
(defined as work which is predominantly
intellectual in character, and which includes
work requiring the consistent exercise of
discretion and judgment) in a field of science or
learning customarily acquired by a prolonged
course of specialized intellectual instructions
OR - Whose primary duty is the performance of work
requiring invention, imagination or talent in a
recognized field of artistic or creative endeavor
68Professional Exemption (Cont.) The Learned
Professional
Key Defined Terms
- The employees primary duty must be the
performance of work requiring advanced knowledge - In a field of science or learning
- Customarily acquired by a prolonged course of
specialized intellectual instruction
69Professional Exemption (Cont.) Advanced
Knowledge
- Predominately intellectual in character
- Includes work requiring the consistent exercise
of discretion and judgment - The advanced knowledge is generally used to
analyze, interpret or make deductions from
varying facts or circumstances - Cannot be attained at the high school level
70Professional Exemption (Cont.) Field of Science
or Learning
- Occupations with recognized professional status
include
Law Accounting Actuarial Computation
Theology Teaching Physical Sciences
Medicine Architecture Chemical Sciences
Pharmacy Engineering Biological Sciences
71Professional Exemption (Cont.) Prolonged Course
of Specialized Intellectual Instruction
- Specialized academic training is a prerequisite
for entering the profession - Best evidence that an employee meets this
requirement is possession of the appropriate
academic degree
72Professional Exemption (Cont.) Prolonged Course
of Specialized Intellectual Instruction (Cont.)
- Does not include occupations that may be
performed with - Only the general knowledge acquired by an
academic degree in any field - Knowledge acquired through an apprenticeship
- Does not apply to occupations in which most
employees acquire skill by experience
73Professional Exemption (Cont.) Examples of Exempt
Professionals
- Lawyers
- Teachers
- Accountants
- Pharmacists
- Engineers
- Actuaries
- Chefs
- Athletic trainers
- Licensed funeral directors or embalmers
- Nurses (RNs, not LPNs)
74Professional Exemption (Cont.) Examples of
Non-Qualifying Professionals
- Accounting clerks and bookkeepers who normally
perform a great deal of routine work - Cooks who perform predominantly routine mental,
manual, mechanical or physical work - Paralegals and legal assistants
- Engineering technicians
75Professional Exemption (Cont.) The Creative
Professional
Key Defined Terms
- The employees primary duty must be the
performance of work requiring invention,
imagination, originality or talent in a
recognized field of artistic or creative endeavor
76Professional Exemption (Cont.) Recognized Field
of Artistic or Creative Endeavor
Fields include
- Music
- Musicians, composers, conductors, soloists
- Writing
- Essayists, novelists, short-story writers, play
writers - Screen play writers who choose their own subjects
- Responsible writing positions in advertising
agencies - Acting
- Graphic Arts
- Painters, photographers, cartoonists
77Professional Exemption (Cont.) Invention,
Imagination, Originality or Talent
- Must perform work requiring invention,
imagination, originality or talent - Determined on a case-by-case basis, depending on
the extent of the invention, imagination,
originality or talent exercised - Does not include
- Work that primarily depends on intelligence,
diligence and accuracy - Work that can be produced by a person with
general manual ability and training
78Professional Exemption (Cont.) Industry-Specific
Examples Journalists
- Employees of newspapers, magazines, television
and other media are not exempt if they - Collect, organize and record information that is
routine or public - Do not contribute a unique interpretation or
analysis - Their work product is subject to substantial
control - Journalists may be exempt if they
- Perform on-air in radio or television
- Conduct investigative interviews
- Analyze or interpret public events
- Write editorials, opinion columns or commentary
79Computer Employees
- The exemptions apply only to a computer employee
whose primary duty consists of - (1) the application of systems analysis
techniques and procedures, including consulting
with users, to determine hardware, software or
system functional specifications - (2) the design, development, documentation,
analysis, creation, testing or modification of
computer systems or programs, including
prototypes, based on and related to user or
system design specifications
80Computer Employees
- (3) the design, documentation, testing, creation
or modification of computer programs related to
machine operating systems or - (4) a combination of the aforementioned duties,
the performance of which requires the same level
of skills
81Computer Employees
- Other than the new minimum salary level of
455/wk (or 27.63/hr under FLSA Section
13(a)(17)) the exemption for computer employees
has not changed - Note, however, that certain computer employees
who may not fall within this exemption may
nonetheless qualify under the executive or
administrative exemption, as applied under the
new regulations - Job titles not determinative
- Does not include employees engaged in manufacture
and repair of computer hardware and related
equipment - Example a systems analyst is an exempt
administrative employee if primary duty includes
work such as planning, scheduling and
coordinating activities required to develop
systems to solve complex problems of the employer
or employers customers
82Outside Sales Employees
- Employee whose primary duty is making sales or
obtaining orders or contracts for services or for
the use of facilities, and who is customarily and
regularly engaged away from the employers place
or places of business - Work incidental to and in conjunction with the
employees sales activities, including incidental
deliveries and collections, are regarded as
exempt outside sales work - Outside sales refers to an employee who makes
sales at the customers place of business or, if
selling door-to-door, at the customers home.
Does not include mail, telephone, or internet
sales - Promotional work that is incidental to and in
conjunction with employees own sales work is
exempt outside sales work
83What do we do now?
- Unless Congress blocks the new regulations,
employers have until August 23, 2004 to become
compliant Do not wait and see what happens - Consult with human resources and in-house and
outside legal counsel to develop a strategy to
comply with these regulations - Review current salary levels for current exempt
and determine who is below 455 per week
84What do we do now?
- Review current non-exempt employees whose
earnings exceed 100,000 per year Do they now
qualify under the Highly Compensated employee
test - Review payroll practices regarding deductions
- Develop a Safe Harbor policy
- Review job duties and determine whether positions
should be reclassified