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Understanding the new overtime rules
Who gets paid overtime? If you’re like most employers, that question has caused more than a few sleepless nights. After all, lots of money rides on the answer. Load up the hourly gravy train, and you end up bloating your payroll and eroding your profits. Exempt the wrong people, however, and you face a worse risk: costly litigation for back pay from employees claiming misclassification.
No wonder employers often feel caught between red ink and a lawsuit. Is there a solution? Maybe so: New overtime regulations from the U.S. Department of Labor bring some clarity to what has long been a woolly patchwork of regulations (see “Update”).
The new rules, which took effect Aug. 23, 2004, seem to be a mixed blessing. On one hand, it looks as though more lower income workers will be eligible for overtime. That means you may well be paying out more in wages under the revised regulations. On the other hand, the extra expense may be more than offset by a decline in legal expenses. Because the new regulations are somewhat clearer about what types of employees must be granted overtime, the number of “wage and hour lawsuits” is expected to decrease.
Three key changes
The new rules mandate overtime for all workers earning less than $455 per week (which translates to $23,660 annually). This three-fold increase from the former threshold of $155 is expected to increase the number of nonexempt workers by some 6.7 million.
Workers earning more than $455 weekly and less than $100,000 annually are subject to protections from loss of overtime pay, under standard “duties tests” that are equal to or more protective than former tests. This provision, then, should also increase the number of nonexempt workers.
Employees who earn more than $100,000 in annual pay are subject to a new set of “duties tests,” which are less protective than the ones for the middle tier of workers. This provision is expected to result in some 107,000 highly compensated employees losing overtime protection.
Avoid costly penalties
Delay too long, and you can get hit with costly financial penalties from two sides. First, employees may sue you for misclassifying them as exempt from overtime, leading to back-wage settlements. Second, you may be hit with government fines. “If you do not comply for any overtime that the Department of Labor believes you should have paid to employees,” says Timothy S. Bland, a partner in the Memphis office of Ford & Harrison, a law firm that defends businesses on employment-related matters. “You can also be assessed liquidated damages — fines totaling double the back pay you are deemed to owe misclassified employees.”
In either case, it’s clear from the above comments that the longer you wait, the greater the potential financial damages. Be aware that your investigation may uncover instances of what attorneys call “task creep.” This refers to the gradual modification in the duties performed by an employee, so that a formerly exempt individual becomes nonexempt, or vice versa. Task creep can occur unnoticed, and it can lead to serious misclassifications.
Your payroll may increase
Smaller employers in general may be more affected since they may have a greater percentage of employees who might not meet the minimum salary test under new rules. The effect may be mollified in some cases by a reduction of overtime eligibility by individuals who earn salaries higher than the legislation’s “highly compensated” upper threshold.
If an employee makes $100,000 a year and the person’s “primary duty” includes performing office or non-manual work, the employer only has to justify exemption by showing that the employee “customarily and regularly performs any one or more of the exempt duties ‘as specified in the regulations.’”
“This will impact those employers who have hourly jobs near the upper threshold,” Harkins says.
The muddled middle
Unfortunately, the new guidelines are not much help. “While the law is slightly different in wording, it is basically similar to the old one,” Harkins says. “You must still deal in vague terms such as ‘independent judgment’ and ‘discretion’ and ‘responsibility to hire and fire.’”
You and your attorney will need to reference the complete law, which defines terms, describes details and provides real-world examples. Here, though, are some key points that will assist you when talking with your course’s attorney.
The Department of Labor has stated that you may classify as exempt from overtime certain employees whose workplace activities “primarily involve executive, administrative or professional duties.” Most readers of this article will be concerned with the first two categories. In addition to the salary tests described earlier in this article, exempt individuals in these categories must meet the following “duties tests.”
Smaller employers may need to take a close look at their operations to see if their assistant managers remain exempt under these guidelines, particularly in light of the fact that these individuals must be supervising two full-time employees.
Owning a 20 percent or more equity interest in the business, by the way, does not make someone automatically exempt. That person must also be actively engaged in management.
You may already be relying on the administrative exemption for personnel who are not managers but who are critical to your operations. Unfortunately, the language of the new regulations adds little or no clarity in this area. “We had hoped that the administrative exemption would be cleared up and made easier to apply,” Bland says. “That’s not the case.”
Just how much “discretion and independent judgment” has to exist to meet the duties test is extremely difficult to apply in the real world. “Some employees have very little discretion in the job and are obviously not exempt,” Bland says. “A few have so much discretion they clearly are exempt. But most employees by far fall into a gray area, so it comes down to a judgment call.”
Be aware that the above paragraphs provide a sketch of the complete picture, the shading and color of which must be filled in by you and your course’s attorney. They do, however, provide a basis for discussion.
Define your terms
Reiterating such definitions is beyond the scope of this article and must be done in conjunction with your facility’s attorney to analyze the particular status of your personnel. One term, though, is particularly important because it pops up in all of the duties analyses. That is “primary duty.”
The term primary duty has been expanded from the time spent on exempt work to the perceived value of exempt work. The new regulations have discarded the old rule that an exempt individual could not spend more than 20 percent of time on nonexempt work. Indeed, it’s not even necessary that an individual spend more than 50 percent of work time on a duty for that activity to be deemed “primary.” Rather, the determination must be made on a case-by-case basis, taking into account such matters as “the relative importance of the exempt duties” and “the employee’s relative freedom from direct supervision” and wage disparities between the individual and nonexempt employees.
An employer might claim that many nonexempt tasks performed by an employee are in support of exempt tasks. By way of example, an administrative assistant might be doing a lot of clerical tasks but they are all in support of getting vendor agreements in order. This person might well be classified as exempt.
At what point does the performance of nonexempt duties threaten exempt status? There is no cut-and-dried rule. As guidance, the regulations state “exempt executives make the decision regarding when to perform nonexempt duties and remain responsible for the success or failure of business operations under their management while performing the nonexempt work.”
When faced with ambiguity, many employers are taking the “better safe than sorry” option. “I do not see a lot of clients going out of their way to make hourly people salaried,” says Harkins. “But I do see employers taking salaried people and putting them into the hourly category. So I would not be surprised if the new legislation increases the number of people eligible for overtime to a level even higher than what the DOL
Now is the time to take a new look at your own employees and classify them appropriately. When in doubt, remember that the law presumes your employees are hourly. It’s up to you to show otherwise. Says Harkins: “It’s always legally safer to pay wages and overtime.”