Crain's Cleveland Business
Displayed with Permission of Crain's Cleveland Business.
Copyright Crain Communications Inc. January 10 - 16, 2005

Of Counsel
Employers wise to review overtime rules.
By Karen L. Giffen

Click here to view PDF of the entire January 10, 2005 article.

There has not been a major overhaul of the rules regarding which employees must be paid overtime since 1975. In 2004, the Department of Labor finally did some updating of the antiquated rules by announcing new regulations regarding which employees will be exempt from overtime pay requirements. These new regulations will affect many businesses.

The Fair Labor Standards Act (FLSA) is the federal law which requires that most employees be paid time and one half their regular rate of pay for hours worked in excess of 40 hours per week. Figuring out which employees are exempt from these requirements is the tough part and the penalty for misclassifying employees may be heavy.

WHAT SHOULD BUSINESSES DO NOW? Although the new rules do not represent a wholesale change in the way employees are treated under the FLSA, they do resolve many issues which the old rules left open to debate. Employers should now review their current employee classifications, job descriptions, employee benefit plans, disciplinary policies, and compensation practices to determine whether they are in compliance with the new rules. The Department of Labor has an excellent overview of the new rules at their website: http://www.dol.gov/esa/regs/compliance/whd/fairpay/.

SUMMARY OF RULES. In order for businesses to start the review process, here is a summary of the current basic rules for classifying employees. There are three basic FLSA exemption categories: administrative employees; professional employees; and executive employees. There are other less common exemptions, such as an exemption for outside sales employees and certain employees in computer related fields.

In order to qualify for an exemption in one of the three basic exemption categories, employees must pass a salary basis test, a salary level test, and a job duties test.

SALARY BASIS TEST. In order to be exempt from overtime pay requirements, most employees must be paid on a salary basis. Being paid on a salary basis means the employee receives a predetermined amount of compensation each pay period without regard to the quality or quantity of the work performed. In other words, employers cannot dock the pay of exempt employees without risking these employees becoming non-exempt.

The new regulations permit employers to reduce an exempt employee's compensation in specific circumstances such as absences for one or more full days due to sickness if deductions are made under a sick pay policy. Deductions may also be made for penalties imposed for violations of major safety rules or for unpaid leave taken pursuant to the Family Medical Leave Act.
SALARY LEVEL TEST. Under the new regulations, most employees who earn less than $23,660 will be considered non-exempt no matter what their duties might be. There is no salary level test for certain kinds of employees such as outside sales employees, doctors, teachers, and lawyers.

Also, most employees who have total annual compensation of $100,000 or more are automatically exempt if they regularly perform one or more job functions of administrative, executive, or professional employees. Skilled tradesmen, public safety employees, and non-management production line workers are non-exempt even if they receive more than $100,000 of compensation.

THE JOB DUTIES TESTS. In order to qualify for an "executive exemption," the employee must have a primary duty of managing the business, such as determining manufacturing techniques or planning and controlling the budget. The executive must also customarily and regularly direct the work of two or more full-time employees. Although the executive employee need not have the ultimate authority regarding the hiring or firing of employees, the executive's recommendations regarding such changes must be given particular weight.

Administrative employees are exempt if their primary duties relate directly to assisting in the running or servicing of the business. The administrative employee must exercise discretion and independent judgment with respect to matters of significance to the business. Discretion and independent judgment requires the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.

Finally, a professional employee is exempt if his or her primary duties require knowledge of an advanced type usually acquired by a prolonged course of specialized instruction or require invention, imagination, or talent in a recognized field of artistic or creative endeavor.

WHY DO THE REVIEW? Often, employers do not learn that they have made an error in their classification of employees until they are sued. The damages for failing to pay overtime may be significant. Although a complete review of the exemption status of each employee before a lawsuit may be time consuming, the time and money will be well spent.