Practical Advice Regarding the Overtime Rules

Modifications to the Fair Labor Standards Act's (FLSA) overtime rules went into effect August 23, 2004, but FLSA remains one of the most violated of the employment laws. Violations most often arise from the mistaken belief by employers that a salaried employee is necessarily an exempt employee. The confusion generates significant and costly litigation against employers who improperly classify non-exempt workers as exempt.

It is not the risk of a Labor Department audit but the likelihood of a lawsuit filed by an employee after the relationship has soured that warrants paying attention to the proper classifications. To avoid judgments for back overtime pay, penalties and interest, employers should take the time necessary to evaluate each employee position to insure proper classification as exempt or non-exempt.

Proper classification is determined by law. An employer and an employee cannot avoid the overtime pay requirements by agreement; therefore, even if an employee agrees to an exempt status while employed, that employee upon termination of employment could sue the employer for all unpaid overtime that accrued during the employee's tenure. As such, even if the employee prefers an "exempt" designation, which is often the case because there is a perception in the workforce that the exempt workers are the "professionals" or the "important" workers, it is imperative that the employer properly classify the position. Employers can avoid perception problems by clearly and consistently informing their employees that their classification is determined by the law and not by agreement or status.

The Basic FLSA Overtime Rule: Employers must pay employees overtime pay of time-and-one-half of employees' regular rate of pay for all hours worked in excess of 40 hours in any work week.

Exception to the Rule: A position is "exempt" from the overtime rules if it meets both the Salary Level Test and the Duties Test

1. Salary Level Test:

• Generally, hourly paid workers are non-exempt and must be paid overtime.
  
• With few exceptions, an employee paid a salary of less than $455 per week, or $23,660 annually, is non-exempt and must be paid overtime.
  
• Positions that pay between $23,660 and $100,000 may be non-exempt depending on the duties of the position.
  
• An employee who earns at least $100,000 and has an identifiable executive, administrative, or professional (see definitions below) duties is automatically exempt. These employees are called "highly compensated" employees.

2. Duties Test:

The terms "Executive," "Administrative," "Professional" & "Highly Compensated" are specifically defined legal terms:

Executive: An employee who:

• has the primary duty of managing the business or part of it;
  
• regularly directs the work of two or more employees;
  
• has authority to hire, fire, promote or make recommendations on hiring and firing that carry significant weight; and
  
• receives a minimum salary of $455 per week, but deductions for certain absences and penalties are allowed.

Administrative: An employee who:

• does office or non-manual work directly related to management policies or general business operations;
  
• performs work that involves the exercise of discretion and independent judgment on matters of significance; and,
  
• receives a minimum salary of $455 per week, but deductions for certain absences and penalties are allowed.

Professional: An employee who:

• does work requiring advanced knowledge of an advanced type in a field of science or learning (learned professionals include lawyers, accountants, architects and doctors); or
  
• does work that requires invention, imagination, originality or talent in the field of artistic or creative endeavor (creative professionals include musicians, actors and writers); or
  
• works with computers with respect to the application of systems analysis techniques and procedures, including consulting with users to determine hardware, software or systems functional specifications; the design, development or testing of computer programs; or a combination or those duties (computer professionals); and
  
• receives a minimum salary $455 per week, but deductions for certain absences and penalties are allowed.

Highly Compensated: An employee who:

• receives a salary of at least $100,000 annually; and
  
• does work that has at least one identifiable executive, administrative, or professional function.

Once an employer has properly classified its employees, it must be careful not to lose the exempt status for its employees by docking pay for missed work or performance issues. Under the Old Rules, an employer could not dock the pay of a white collar exempt worker in increments of less than a full week of pay without jeopardizing the exempt status of that employee. The New Rules do provide for partial week deductions from the employee's predetermined salary but only under certain circumstances. For example, the New Regulations will allow an employer to discipline an employee for a material violation of workplace conduct policy by making a deduction from the worker's pay in an amount less than a full week.

The modifications to the rules created a Safe Harbor Provision. This provision provides that an employee's exempt status will not be revoked permanently due to an employer's improper deduction if:

1. the employer has a clearly communicated workplace policy which prohibits improper deductions and includes a stated course of action employees can take to register and remedy a complaint regarding an improper deduction;
2. the employer evidences a good faith commitment to compliance with the wage laws; and
3. the employee is fully reimbursed for the improper deduction.

We help this memorandum is helpful to you. If you have any questions or need assistance implementing the Rules in your workplace, please call Lynn Perry Parker at (301) 251-1180.