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Record retention is complex and time consuming. However, in addition to complying with various federal and state laws, keeping good, well-organized records can be very helpful in documenting and supporting an organization’s employment actions.
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April 21, 2004
Final Overtime Regs Unveiled: What They Mean for Employers

Legal Editor, Business & Legal Reports

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The U.S. Department of Labor has finally issued the new and final regulations to the Fair Labor Standards Act (FLSA). Now employers have only 120 days to bring their companies in compliance with the law. This means that employers across the country must quickly review employees' overtime status to determine whether they fall within the exempt or nonexempt categories of the FLSA's new regulations. How can human resources professionals efficiently understand the new rules, audit the company's workforce, and correctly identify where and how FLSA status changes must be made? Read on...

What are the major changes to the FLSA's rules?

The final overtime regulations issued by the Department of Labor (DOL) make a number of changes to the way in which employers will apply the FLSA tests and determine employees' exempt or nonexempt status. The following major changes were made to the FLSA:

  • The salary threshold has been increased, almost threefold, to $455 per week ($23,660 annually). This means that any employee earning less than this amount automatically qualifies for overtime pay.

  • Highly compensated employees who earn $100,000 per year or more and who customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee are exempt from the overtime requirements. These employees must receive at least $455 per week on a salary basis to qualify under this exemption.

  • The so-called "white collar" exemptions do not apply to manual laborers or other "blue collar" workers who perform work involving repetitive operations with their hands, physical skill, and energy. FLSA-covered, non management employees in production, maintenance, construction, and similar occupationsare entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt no matter how highly paid they might be.

  • Police officers, firefighters, paramedics, and other so-called "first responders" such as detectives, deputy sheriffs, and state troopers, are not exempt employees and are entitled to overtime pay.

  • Executives are no longer required to "regularly exercise discretionary powers" in order to qualify as exempt (as they were required to do by the old "long test"). There no longer is a special exemption for "sole charge" executives.

  • Time devoted to nonexempt work. There no longer is a requirement that executive, administrative, professional, and computer employees devote no more than 20 percent of their time to nonexempt work in order to qualify as exempt, as was required by the old "long test."

  • Learned professionals. For the learned professional exemption the phrase "work requiring advanced knowledge" is defined as work that is predominantly intellectual in character, and that includes work requiring the consistent exercise of discretion and judgment.

  • Business owners who own at least 20 percent equity interest in their company must be actively engaged in the management of the company to qualify as exempt.

  • Exempt executives and "particular weight." Exempt executives must still have the authority to hire or fire other employees, or their suggestions and recommendations as to the hiring, firing, or any other change of status of other employees must be given "particular weight," as in the old rules. In the new rules, though, "particular weight" is defined by a set of factors to consider including whether it is part of the employee's job duties to make such suggestions and recommendations; the frequency with which such suggestions and recommendations are made or requested; and the frequency with which the employee's suggestions and recommendations are relied upon by others.

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Controversial proposals that died on the vine

Although most proposed changes to the FLSA survived the rulemaking process, a few did not. Most notably:

  • Discretion and independent judgment test remains. Two of the proposed changes, the "position of responsibility" and "high level of skill or training" tests, for the administrative exemption did not make it into the final rules. Instead, the new rules keep the old "discretion and independent judgment" test, which was not included in the proposed rules.

  • Learned professionals education. No changes were made to the educational requirements for learned professionals in the final regulations. References to training in the armed forces and education at a technical school or community college, in lieu of the advanced knowledge customarily acquired by prolonged intellectual instruction requirement, that were present in the proposed regulations for the learned professional exemption, failed to make it into the final rules.

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New rules for deductions from pay

In addition to the rules governing overtime, exemptions, and the tests to determine exempt status, the FLSA regulations regarding deductions from pay have been changed. The new regulations state that if an employer has a practice of making improper deductions from the pay of exempt employees, the employer will lose the exemption for the entire class of employees who work for that manager in that job classification.

The regulations emphasize, though, that improper deductions that are either isolated or inadvertent will not result in the loss of the exemption, as long as the employer reimburses the employees for improperly deducting from their pay.

In addition, an employer may prevent the loss of the exemption by:

  • Having a clearly communicated policy, which includes a complaint mechanism, that prohibits improper pay deductions

  • Reimbursing the employees for any improper deductions

  • Making a good-faith commitment to comply with the regulations in the future

But, if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints, then the exemption will be lost.

The regulations outline the best evidence of a clearly communicated policy:

  • A written policy

  • Distributed to employees prior to the improper pay deductions by:

    • Providing a copy of the policy to employees at the time of hire

    • Publishing the policy in an employee handbook

    • Publishing the policy on the employer's intranet

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What do the new regs mean to employers?

How will these changes affect your organization? The answer depends on the number of employees who fall close to the margins for change either through the new salary thresholds or the new duties tests. Recent FLSA enforcement activity by the DOL has also shown a targeted effort to investigate low-wage industries with vulnerable, and often immigrant, workforces, and those industries with a history of chronic violations, including garment manufacturing, agriculture, and health care. Nearly a third of the DOL's enforcement resources are attributed to investigations in nine selected low-wage industries, which also include day-care, restaurants, janitorial services, and temporary help.

Regardless, one fact remains: Employers who do not conduct workforce assessments to ensure that employees are correctly classified under the FLSA's rules take the serious and potentially expensive risks of employee class action lawsuits and DOL audits.

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Beware of the FLSA 'Bermuda Triangle'

The convergence of three FLSA developments has pushed the FLSA closer than ever to the forefront of employer concerns. This "Bermuda Triangle" of factors presents a triple threat to employers trying to navigate the dangerous course to compliance. The three corners of the FLSA Bermuda Triangle are:

  1. The number of class action wage and hour lawsuits continues to grow as plaintiffs' attorneys recognize the potential for large payouts.

  2. DOL wage and hour settlements have reached an all-time high, with record increases in back pay settlements and civil money penalties.

  3. This week's release of the new FLSA regulations will affect the classification and overtime eligibility of millions of employees.

The DOL has estimated that more than one-half of employers have incorrectly classified employees under the FLSA. In each of these cases, only one employee complaint to the DOL concerning overtime is required to open an investigation of the entire company's classification methods. It is imperative that employers begin auditing their organizations now, before they face a DOL audit or expensive lawsuit.

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Multi million dollar class action lawsuits

Wage and hour class action lawsuits are big business for plaintiffs' attorneys. According to the HR Policy Association, an organization of senior human resources executives of Fortune 500 corporations, the number of FLSA class action lawsuits filed in federal court increased exponentially in 2003. More than 100 individual lawsuits were filed in the past year. Since 1997, the number of wage and hour class actions has tripled, while class action discrimination claims have remained at 70 to 80 per year.

Class action lawsuits, whether litigated or settled, typically run into the millions of dollars. For example:

  • Farmers Insurance lost a class action lawsuit brought by 2,400 claims adjusters. The jury's verdict against the company was $90 million for failure to pay overtime.

  • Pacific Bell settled a lawsuit brought by 1,500 personal bankers misclassified as exempt. The damages were $35 million.

  • Coca-Cola paid $20 million in real money to settle misclassification charges brought by California employees.

  • United Parcel Service workers misclassified as exempt settled with the company for $18 million.

Why are we seeing such an increase in wage and hour lawsuits? The drive for employers to cut costs and increase productivity has made exempt employees more attractive, because they can work unlimited hours without receiving overtime pay. As a result, there is a temptation for employers to classify workers as exempt, when by law they should be classified as nonexempt.

The FLSA also provides significant financial incentives to employee-plaintiffs and their attorneys to aggressively bring wage and hour lawsuits. In many cases, the FLSA allows for double damages and attorneys' fees. Considering the potential for sizable settlement and judgment amounts, it is entirely likely that the number of FLSA lawsuits brought against employers will continue to increase.

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DOL enforcement activities

There's big money at stake when DOL comes calling. The DOL's Wage and Hour Division (WHD) enforcement statistics bear this out:

  • WHD recovered more than $212 million in back wages in fiscal year 2003. This represents a 21 percent increase over 2002, a record-setting year, and a 60 percent increase since 2001.

  • This enforcement activity cost employers nearly $10 million in civil money penalties.

  • More than 300,000 employees received back wages totaling $182 million dollars, representing a 30 percent increase from 2003.

Audits are triggered when a current or former employee files a complaint with the DOL. With the new FLSA regulations in the news on a regular basis, employees are increasingly knowledgeable about their rights under the FLSA. Employees know they will be heard if they knock on the DOL's door. So, proactive employers are addressing any incorrect classifications that might exist now, rather than waiting for that knock.

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So, what do I need to do now?

To help ensure that your company will not be subject to a multi million dollar FLSA claim or a DOL audit, conduct an internal audit now. You will preempt the DOL and the plaintiffs' attorneys, and discover any misclassifications before it is too late. As part of your audit, you should:

  • Review job descriptions to determine whether they are still accurate, reflect the jobs being performed, and reflect the skills necessary to perform the job.

  • Review employees' actual job duties to ensure that they still fall within the administrative, executive, professional, computer, or outside sales exemptions.

  • Make sure you have properly calculated overtime for nonexempt employees. For instance, nondiscretionary bonuses and shift premiums should be included in the calculation of the regular rate of pay.

  • Make sure you have the required posters hung in the appropriate places in the workplace.

  • Pay past overtime due to employees you have misclassified. Paying them now will be far less expensive than paying them in a DOL settlement or class action lawsuit.

In the case of an audit by the DOL, assign a representative of your company, or perhaps legal counsel, to be the main point of communication between the company and the auditors. This person should have a complete understanding of the FLSA.

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