By SUSAN E. PRINCE, J.D.
Legal Editor, Business & Legal Reports
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
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:
- The number of class action wage and hour lawsuits continues to grow as plaintiffs'
attorneys recognize the potential for large payouts.
- DOL wage and hour settlements have reached an all-time high, with record
increases in back pay settlements and civil money penalties.
- 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
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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
- 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
- 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
- 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
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
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