| Bar Bulletin |
June,
2003 |
| June Focus Article |
|
Salaried of Hourly?
Proposed Regulations Affect Overtime for 1.3 Million
By Mark A. DiAntonio
Under proposed federal
regulations, today’s workaholic salaried professional may be tomorrow’s
hourly employee entitled to a boatload of overtime. The eligibility for
overtime pay of more than 1.3 million workers will be affected by
regulations proposed by the Wage and Hour Division of the U.S. Department
of Labor (DOL), according to a DOL estimate. Attorneys for employers and
workers alike should take note of the potential changes to the regulations
governing who qualifies as a salaried employee and who needs to be paid
overtime.
The regulations were
released in March 2003. They represent the first major overhaul in decades
of the federal rules used to determine whether various types of employees
are entitled to overtime pay or can be considered exempt based on their
status as executive, administrative, professional, outside sales or
computer professionals. The comment period for the proposed regulations
ends on June 30, 2003, and the DOL projects that a final version will be
in place by late 2003 or early 2004.
The federal Fair Labor
Standards Act (FLSA) requires that workers be paid at least the minimum
wage for a 40-hour work week and 1.5 times their hourly wage for any
additional hours worked. Under current regulations implementing this law,
an employee may be considered exempt from these requirements if the
employee meets certain income requirements and falls into one of various
categories based generally on the type of work performed. The proposed
regulations streamline and in some instances redefine the rules used to
determine how an employee is to be compensated.
Changes to the Salary Requirement
Under the current
regulations, a salaried executive, administrative or professional employee
is not to be considered exempt from FLSA unless the employee makes at
least $155 per week and meets the requirements of the so-called “short
test” or “long test” depending upon the employee’s weekly salary ($155 to
$170 per week for the long test and more than $250 per week for the short
test).
The proposed
regulations update the income level for all salaried executive,
administrative or professional employees to $425 per week. For computer
professionals, the salary requirement is $425 per week or $27.63 per hour.
The hourly rate continues the test used for computer professionals under
the current regulations. Outside sales employees would continue to not
have a minimum salary requirement.
The proposed
regulations would also consider as exempt an employee who makes $65,000
per year, performs nonmanual labor and meets at least one of the functions
under the executive, administrative or professional categories described
in the “duties test” outlined below. In general, the $65,000 includes base
salary, commissions and nondiscretionary compensation paid at least on a
monthly basis.
Changes to the “Duties Test”
After determining that
an employee meets the minimum salary requirement, the next step in
verifying exempt status is applying the duties test. To be exempt, an
employee’s duties may be considered executive, administrative or
professional, or the employee may be classified as a computer professional
or outside salesperson.
Under the current
regulations, an employee’s status as an executive, administrator or
professional is determined by using the “long test” or “short test”
depending on the employee’s weekly salary, as discussed above. Under the
proposed regulations, if the employee meets the $425 weekly pay
requirement, one “standard test” will be applied. This test borrows some
criteria from the current tests and deletes others. The duties tests for
the respective categories of exempt employees are as follows:
- Executive
– To be an exempt executive, an employee must: 1) have as his/her
primary duty the management of the business or a recognized department
or subdivision; 2) regularly direct the work of two or more employees;
and 3) have authority to hire and fire or have his/her recommendations
on personnel matters given particular weight.
The major change would
be the addition of the hiring/firing requirement. Also, the proposed
regulations recognize as an exempt executive any employee who owns at
least a 20 percent equity interest in the business. The exemption would
continue for an employee who is in “sole charge” of an establishment,
i.e., a senior employee with authority to make daily operational
decisions and direct the work of others.
- Administrative
- To be an exempt administrator, an employee must: 1) have as his/her
primary duty the performance of office or nonmanual work directly
related to managing the general business of the employer or its
customers; and 2) hold a “position of responsibility,” defined as either
work of substantial importance or work requiring a high level of skill
or training.
The proposed
regulations offer illustrations of work areas meeting the first
requirement. Employees in accounting, purchasing, advertising and human
relations positions, for instance, would likely be considered
administrative. The “position of responsibility” requirement would replace
the current requirement that the employee customarily and regularly
exercise discretion and independent judgment, which led to varied
interpretations by the courts. While the proposed language may seem
equally as vague, the DOL identified activities that will likely fall
within the rubric of an administrative employee: formulating or
interpreting management policies, making or recommending decisions having
a substantial impact on the business, performing strategic planning or
handling complaints and grievances.
- Professional
– Exemptions exist for “learned” or “creative” professionals. The
learned professional must have a primary duty of performing office or
non-manual work requiring advanced knowledge acquired by a prolonged
course of study or through a combination of instruction and work
experience. A creative professional must have a primary duty of
performing work requiring invention, imagination, originality or talent
in a recognized field or artistic or creative endeavor.
Eliminating the diploma
requirement for learned professionals is the most significant proposed
change. This may allow employers to treat employees with some college and
on-the-job training as exempt; however, the threshold amounts of formal
training and experience are not specified. The creative professional
requirements remain relatively unchanged.
- Outside Sales
Employees – Under the proposed regulations, the exemption would
apply to employees who regularly work away from the employer’s business
and have a primary duty of obtaining orders. The major change involves
eliminating the confusing calculation of time devoted by an outside
salesperson to “non-sales” activities.
- Computer
Professionals – These regulations would remain the same but would be
gathered into one section.
How to Prepare for the Proposed Regulations
The proposed
regulations may change slightly or drastically between now and the
projected effective date later this year or early 2004. Therefore, there
is little reason or necessity for an employer to change its policies or
behavior now. However, employers may want to consider how the proposed
changes may adversely or favorably impact their payroll, particularly if
they have a large group of employees who could shift from salaried to
hourly or vice versa. Also, the proposed regulations provide a safe-harbor
provision for employers making good-faith reductions from exempt
employees’ pay. This requires prior written notice to employees for the
employer to avail itself of the protection. Employers may want to consider
adding to their employee handbooks a written policy giving that notice to
employees.
Finally, it should be
kept in mind that Maryland has an equivalent statute in the Labor and
Employment Article which mirrors the current federal regulatory scheme.
Assuming the new federal regulations go into effect, any stricter
standards contained in the Maryland law will remain in force.
