Department of Labor Proposes Sweeping Changes to Regulations Governing Overtime Pay
 
March 28, 2003
 
Todd D. Steenson- Chicago

Yesterday, the federal Department of Labor (DOL) announced that it is proposing sweeping changes to the federal regulations that govern whether workers qualify for overtime pay under the 1938 Fair Labor Standards Act (FLSA). The proposed changes appear to increase the number of lower-paid workers who will be eligible for overtime, broaden the class of “professional” employees exempt from the overtime requirements, and attempt to clarify the difficult administrative exemption.  The DOL estimates that the proposed regulations will affect 110 million employees in 6.5 million establishments.

To date, the Department of Labor has released only its summary of the proposed changes; the actual text of the proposed regulations will not be published until March 31, 2003.  Additionally, these regulations are not yet in force, and may change as a result of public comments that will be received in the next 90 days. However, given the significance of these changes, Holland & Knight is providing this alert based upon the summary the DOL has released. 

Minimum Salary Level Increased. Under current rules, an employee earning only $155 a week, or $8,060 a year, can qualify as a “white collar” employee not entitled to overtime pay. The Department’s proposal would raise the minimum salary necessary for overtime exemption to $425 a week or $22,100 per year.  The proposal also eliminates the $250 per week minimum salary applicable to the old “short test” for exempt status. This increase of $270 a week in the minimum salary requirement is the first increase since 1975 and the largest single increase since the FLSA was enacted. The DOL estimates that the new minimum salary level will make approximately 1.3 million additional workers eligible for overtime pay.

This means that any worker earning less than $22,100 a year automatically would be entitled to overtime pay, even if he or she is paid a salary and otherwise performs exempt duties.

Changes to the Duties Test

The regulations address the three principal exemption categories – executive, administrative and professional – and contain the first changes to these exemptions in many years.  The proposed changes appear to limit the executive exemption, broaden the professional exemption, and eliminate a portion of the administrative exemption that has caused substantial confusion.

Executive Duties.  The proposed executive duties test somewhat restricts the availability of the exemption.  Currently, to qualify as an exempt executive, an employee must have a primary duty of managing the enterprise or a recognized subdivision and must regularly direct the work of two or more employees.  The proposed regulations retain these requirements, but add that the executive must have the authority to hire or fire (or the ability to make effective  recommendations regarding these decisions).   

 Administrative Duties. Currently, to qualify as an exempt administrative employee, an individual must perform office work relating to management policies or general business operations and regularly exercise “discretion and independent judgment.” The proposal retains the general duties requirement, but would replace the “discretion and independent judgment” test, which has been the subject of confusion and litigation, with a new test that employees must hold a “position of responsibility.”  

Professional Duties. The proposal substantially expands the category of exempt “professional” employees by recognizing that employees can achieve exempt professional status through a combination of job experience, military training, attending a technical school or attending community college.  The current regulations require an employee to perform “work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study” to qualify as an exempt professional. This phrase has been interpreted to require, in most cases, more than a general Bachelor’s Degree.

Permissible Deductions from Exempt Employees’ Pay for Disciplinary Reasons Expanded  

The current regulations sharply limit the circumstances under which an employer may deduct from an exempt employee’s pay for disciplinary reasons. The proposed regulations would allow deductions from the salary of exempt employees for full-day absences imposed for many disciplinary reasons, such as sexual harassment or workplace violence.  However, the proposal retains the “salary basis” rule prohibiting deductions from exempt salary for partial-day absences.

These rule changes have been widely sought by the business community, which has argued that the current rules are archaic, difficult to apply and require payment of overtime to many skilled professionals.  They also may be in response to a surge in large, class action lawsuits seeking overtime pay. However, union officials have said they would oppose any rule changes that would cause longer workweeks, and are likely to oppose and criticize the proposed rules.

Following the publication of the full text of the regulations on March 31, the public will have 90 days to comment on the proposed regulations.  The Department of Labor may then make revisions to the proposed regulations in light of those comments.  The proposed regulations do not require congressional approval, and could become effective late this year or early next.

Holland & Knight will provide further analysis and guidance regarding the proposed regulations following their publication.  The firm can also assist clients who desire to comment on the proposed regulations.

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