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Recent Litigation and New Regulations Highlight Overtime Obligations for Employers

Client Alerts/Reports

Over the last few years, there has been a substantial increase in class actions brought under the Fair Labor Standards Act (“FLSA”) by workers against their employers for unpaid overtime wages. Recent litigation has successfully challenged the classification of employees of some of the largest retailers in the nation, including WalMart Stores, Inc. These lawsuits generally allege that low-level managers actually do a substantial amount of the same work as regular employees and are misclassified as exempt to avoid paying overtime to these “management” employees. Employers with employees in California are particularly vulnerable to these types of lawsuits because the criteria under State wage-hour law are far more restrictive than under the FLSA. Employers with multi-state operations are cautioned not to use the same analysis in California as they use in other states. [Sidebar: California Wage Orders and Exempt Employees]

Much of the increased litigation for overtime wages is attributable to employers misapplying (often inadvertently) the FLSA rules specifying which employees are entitled to overtime pay, and which are “exempt” from such an entitlement. Employers’ confusion in this regard often stems from their difficulty in applying the somewhat antiquated statute (passed in 1938) to many of the jobs that exist in our modern-day economy.

In an effort to update and simplify the FLSA, which should assist employers in applying it, the Department of Labor proposed changes to the statute in March 2003 and announced its final changes on April 20, 2004. Most of the changes were to the regulations governing the salary and duties tests used to determine which “white collar” workers are exempt from the statute’s minimum wage and overtime compensation requirements. The final rules will be codified in Title 29 of the Code of Federal Regulations, Part 541 and can be accessed on the DOL's website at http://www.dol.gov. They were published in the April 23, 2004 Federal Register and will take effect on August 23, 2004.

The new regulations do not substantially change the basic content of the current duties tests and, therefore, are unlikely to materially affect the wages paid by most employers. Interestingly, the final set of regulations do significantly differ from the ones proposed by the DOL in March 2003. Due to intense pressure from Congress, labor unions and the public, the DOL abandoned many of the proposed changes and, in particular, those relating to the administrative and professional exemptions. Additionally, some members of Congress are talking about introducing legislation to reverse the new rules. In fact, on May 4, 2004, the Senate voted to approve two proposed amendments to the rules. Specifically, one amendment would preserve the current regulatory status with regard to overtime for 55 occupations or job classifications that are allegedly at risk, while the other proposed amendment would prohibit giving any force to any portion of the new rules that would cause any worker who currently is eligible for overtime to lose that eligibility.

The following briefly describes the significant changes made by the new overtime regulations:

  • Minimum Salary Standard for Exempt Employees is Increased -- In order to qualify as an exempt employee, an employee needs to earn, at a minimum, a salary of $455 a week or $23,660 annually, a significant change from the current level of $155 a week or $8,060 annually.
  • Revised“White collar exemptions” -- The final regulations also revised the duties tests for executive, professional or administrative employees used to determine whether an employee falls within such “white-collar exemptions” to the FLSA’s overtime requirements.
  • Executive employees -- The duties test for exempt executive employees remains much the same. An executive employee is one whose primary duty is management of the enterprise or a customarily recognized department or subdivision of that enterprise and one who customarily and regularly directs the work of two or more other employees. However, the new rules add, among other things, the requirement that exempt employees have the authority to hire or fire other employees or make recommendations as to hiring, firing or other changes of employee status that are given particular weight. The rules further provide specific guidance on how to measure whether an employee’s suggestion is given particular weight. Factors to be considered include, but are not limited to, whether it is part of the employee’s job duties to make such recommendations, and the frequency with which such recommendations are made, requested and relied upon.
  • Professional employees -- The new duties test for professional employees closely resembles the current test, and requires that an employee consistently exercise discretion and independent judgment. The new rules further clarify that the “exemption may be available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as degreed employees, but who attained the advance knowledge through a combination of work experience and intellectual instruction.”
  • Administrative employees -- The duties test for administrative employees has remained much the same. Exempt employees are those whose primary duty is the performance of office or nonmanual work directly related to the management or general business operations of the employer, or its customers, and who exercise discretion and independent judgment “with respect to matters of significance.”
  • New Business Owners Exemption - Employees who own at least a bona fide 20% equity interest in the company and are actively engaged in management -- regardless of whether the employee is paid on a salary basis, are also exempt under the new rules.
  • New Rule for “Highly Compensated Employees” – Under the new regulations, employees who perform office or non-manual work and are paid a total annual compensation of $100,000 or more are exempt from the minimum wage and overtime rules of the FLSA if they “customarily and regularly” perform at least one, as opposed to all, of the exempt duties of a white-collar employee, as opposed to fulfilling each of the applicable tests.
  • New Overtime Provisions Apply to Certain Occupations -- The new rules contain provisions stating that employees in certain occupations such as public safety officials and licensed practical nurses, are entitled to overtime. Such employees include “blue collar” workers, police officers, firefighters, paramedics, emergency medical technicians and other public safety “first responders.”
  • New Salary Basis Test Allows for Shorter Disciplinary Suspensions -- Under the new rules, employers may now impose on an exempt employee “unpaid disciplinary suspensions of one or more full days” for “infractions of workplace conduct rules,” such as rules addressing sexual harassment, violence, alcohol and drug abuse, and violations of state and federal laws.

Conclusion

Given the recent increase in FLSA litigation, and to minimize the risk of becoming a party thereto, employers should review their classification of employees as “exempt” or “non-exempt.” The issuance of the new FLSA regulations make this an opportune time to do so, especially since the new regulations might affect the classification of some employees. Employers should also revise their compensation salaries, job descriptions and personnel policies, as necessary, to conform with the new regulations. Taking these measures is a sound business and legal practice and will help to avoid future lawsuits.

This client alert is a publication of Loeb & Loeb and is intended to provide information on recent legal developments. This client alert does not create or continue an attorney client relationship nor should it be construed as legal advice or an opinion on specific situations.

Circular 230 Disclosure: To assure compliance with Treasury Department rules governing tax practice, we inform you that any advice (including in any attachment) (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer, and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.