The New Overtime Rule: Time to Update Your Classifications
Press release from the issuing company
August 26, 2004 -- While the political water is still rolling on the new Department of Labor (DOL) regulations that govern overtime pay for exempt and non-exempt white collar workers, every employer should take a look at their classifications to be sure they are in compliance. The new rule will go into effect on August 23, 2004 unless Congress rescinds it -- a possibility, but not a probability, at this point.
The DOL has an excellent website with what you need to know at www.dol.gov/fairpay. Download the final regulation.
However, we'll try to sum up the critical issues here. Please keep in mind that several states have laws that will have some conflict with these regulations. Employers in these states will need to look at both laws in order to be compliant unless/until these states update their own laws. In many cases, the state law/regulation cites the old federal regulation. Compliance with both the federal and state requirements may be required. For assistance in determining compliance with state law, please see your local PIA/GATF affiliate or legal counsel. The states are: Alaska, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Illinois, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Oregon, Pennsylvania, Washington, West Virginia, and Wisconsin.
For help in determining evaluating your state’s requirements printers are encouraged to contact their local PIA/GATF affiliate and local legal counsel. If you do not have legal counsel experienced in wage/hour laws, your local PIA/GATF affiliate can recommend one or you may contact Hal Coxon, Esq. at the Ogletree, Deakins, Nash, Smoak & Stewart law firm at (202) 887-0855.
As background, the original Fair Labor Standards Act was enacted more than 50 years ago. It has had only minor updates since, even though the workplace is vastly different today than in the past. Employers have been calling for an update in part because the web of old regulations and inconsistent court rulings has resulted in a largely arbitrary compliance framework. In addition, the regulations were very difficult to understand and apply, leading to a recent explosion of litigation pursued by opportunistic trial lawyers.
Last year, DOL issued draft regulations, which resulted in more than 70,000 comments (including ours and many PIA/GATF members) being filed. The draft regulations were the subject of intense political debate and attack. The final regulations recently issued differ in some significant respects from what was proposed last year, and generally are less favorable to employers than the regulations initially proposed. That said, the final regulations, according to the majority of newspapers around the country, do take into account many of the concerns raised, such as clarifying that first responders (police, fire fighters, etc.) and blue collar workers will not lose any overtime pay.
While we believe that the new regulations will make it somewhat easier for our industry to determine who is exempt and non-exempt, it will take a period of time for the dust to settle on the new federal rule. DOL has also pledged heightened enforcement of the new regulations, making it more important than ever to have positions properly classified. Here is a brief synopsis.
Increase in Thresholds
The FLSA requires that most workers in the U.S. be paid at least the federal minimum wage for all hours worked, and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. Under the current rule, all white collar (non-production) workers who earn less than $155 weekly ( $8,060 annually), must be paid overtime, regardless of their job duties. The new rule raises the minimum salary threshold to $455 weekly ($23,600 annually). Thus, any employee who earns less than this amount must be paid overtime for all hours worked in excess of 40 hours in one week, regardless of his or her job duties. Because most employees in our industry that earn between $155 and $455 a week are classified as non-exempt and already receive overtime pay, the increased minimum salary should have little impact for most employers. However, if you have exempt employees who earn less the minimum salary amount, you must either begin paying overtime or raise the employee’s salary above the minimum threshold.
On the high end, the new rule creates a “highly compensated” test for those salaried employees who earn total compensation in excess of $100,000. Because most employees in our industry who earn over this amount already are properly classified as exempt under one of the existing tests, this new test should not affect many of our employers.
Definition of Administrative Employee
So, now, we're left with the employees in the middle range -- between $23,660 and $100,000. The new regulations follow the old ones by placing employees in the categories of executive, administrative, professional, outside sales, and computer employees. For our purposes, the administrative employees have been the most troublesome classifications with wage and hour auditors, particularly with respect to customer service representatives (CSRs) and estimators. The old regulations were so outdated that auditors in different states applied the law differently. This resulted in arbitrary decisions. While printing employers usually won, they did not do so until after legal fees were paid and productive time was lost.
The new rule gives us a glimmer of clarity, albeit not as much as we would have liked. Still, it gives printers a fighting chance to correctly determine whether these employees should be classified as exempt or non-exempt from overtime pay requirements.
The rule provides that an exempt administrative employee is one whose “primary duty” consists of performing office or non-manual work related to the management or the business operations of the employer, and includes the “exercise of discretion and independent judgment with respect to matters of significance.” While this may appear to be tighter than current regulations, the description of duties is more applicable to today's workplace with respect to CSRs and estimators. This may make it more likely that specific positions within companies will meet the requirements of the exemption.
“The exercise of discretion and independent judgment” can include, but is not limited to: “whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; . . .whether the employee performs work that affects business operations to a substantial degree, even if the employee's assignments are related to operation of a particular segment of the business; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval; whether the employee has authority to negotiate and bind the company on significant matters; . . . whether the employee investigates and resolves matters of significant on behalf of management; and whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances.” The example mentioned by DOL's Solicitor General regarding financial impact was, “If you're buying staples at Office Depot, it's not significant; if you're purchasing thousands of dollars worth of raw materials, it's likely significant.”
Further, the rule's preamble, or descriptive section, references other factors, including: “responsibility for assessing customer needs, primary contact to public or customers on behalf of the employer . . .” DOL assures us that the list is illustrative and not definitive, meaning printers will have some leeway in proving whether their CSRs and estimators meet the “discretion and independent judgment” test.
The remaining exemptions to consider are the executive, professional, outside sales, and computer employee exemptions. While the executive exemption has received some significant changes, including the requirement that an exempt executive must have the authority to hire or fire employees, or to effectively recommend a change in status, it is not expected that the changes will materially affect the application of the exemption to our industry. Likewise, the limited changes made to the professional exemption will likely have little impact on printers. With respect to outside sales and computer employers, the rule will be basically the same as it is today.
A change made applicable to all exemptions is the elimination of percentage limitations on exempt v. non-exempt work. The new rules specifically recognize that exempt employees may perform concurrent duties. As long as the employee’s duties meet the duties test for that particular exemption, the fact that the employee may also perform some non-exempt work will not defeat the exemption.
The most prudent course of action for all printers is to review the actual duties now performed by exempt employees who earn between $23,660 and $100,000 per year, and determine whether the actual duties performed meet the requirements of one of the exemptions. This is particularly important given DOL’s statements that it intends to pursue heightened enforcement of the new rules.
Pay Docking Safe Harbor
Under the old regulations, an employee who was otherwise properly classified as exempt could easily lose the exemption if the employee's pay was docked for impermissible reasons such as partial day absences. The problem was compounded by agency and court decisions holding that improper pay docking of a specific position resulted in the loss of that exemption for all of the same job positions within a company.
Two major improvements are made in the new rule. The first significant change deals with improper deductions from pay that would result in a reclassification of an employee as non-exempt. Under the new rule, DOL will look at factors such as whether the employer intended to make improper deductions, how often and wide-spread were these deductions, and whether the deductions were contrary to company policy, such as if a supervisor made the error instead of the owner. If the practice is isolated or inadvertent, and if the employer reimburses the employee, there will be no loss of exempt status. In addition, improper deductions made by one supervisor in one location will not threaten the exempt status of other positions in different location. The new rules require, however, that employers to have a written policy prohibiting improper pay docking in order to gain the benefit of the safe harbor.
The second significant change in the new regulations is that employers may now deduct pay in whole day increments for “disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules.” For example, an exempt employee may be suspended without pay for three days for violating the company’s sexual harassment policy. (Most violations of state civil rights law could be included in a company policy on pay docking.)
DOL also cleared up some case law confusion by not requiring employers to pay the full salary in the initial or last week of employment for exempt employees. Rather, a pro-rated portion of a week’s salary must be paid for any days worked. Any partial days worked must be paid as a full day.
Despite various press reports that certain "think tanks" believe that thousands of low level supervisors will lose their current overtime pay, the Labor Department and others believe this not to be the case. The one issue the "think tanks" and the press are ignoring is how much market pressures influence compensation practices, despite the new regulation.
For example, during the time leading up to the year 2000, computer programmers who were hired to "fix" various Y2K bugs were often paid bonuses, given stock options and grants, and even paid "overtime." Under the new and old versions of the 541 regulations, it is not a violation to pay an exempt employee overtime (which is technically a bonus).
This was the case in with the Y2K event and it sometimes occurs today in the printing industry. Where an employee is in a clear exempt position, an employer may pay the incumbent employee(s) a bonus (or overtime) for time worked over a specified number of hours in a work week. In such a case, the employer is not obligated to pay time-and-one-half, or higher; the employer may even pay straight-time equivalent.
Thereby, the employer is making a discretionary judgment call to pay additional compensation for service in response to market forces. PIA/GATF knows of a few commercial printing companies who have clearly exempt Customer Service Representatives but pay them overtime in response to market pressures and to keep the employees from being hired away.
However, there are downsides. For example, if the employer docks these employees for time-missed, those employees (and others in similar categories) may lose their exemption status and backpay for overtime could be imposed by the Labor Department. Before instituting such a practice, employers should also consider how their employees will react. Depending on the company's culture, it may motivate or de-motivate employees. Clearly, an employer should investigate and consider the pros and cons of such a practice and consult with legal counsel before implementation.
What Happens Next?
If Congress doesn't act to rescind the rule, it will go into effect on August 23rd. In the meantime, you should do the following in order to be compliant:
Review state law requirements to determine if you may have dual compliance concerns (see above).
Review your job descriptions to ensure they match what your employees are actually doing. If your company is ever audited, the Wage/Hour investigator will interview certain employees about their job duties and responsibilities, so ensuring job descriptions match what employees really do is critical.
Identify employees who earn between $13,000 and $23,660. Are they currently exempt? If so, evaluate whether payroll costs will be best controlled by raising their salaries to retain their exempt status (if they meet the new duties test), or by budgeting overtime needs.
Make a determination as to whether your white collar employees are exempt or non-exempt, given the definitions in the new regulation. You can use the PIA/GATF flow-chart to help with this determination.
Identify employees who earn $100,000 or more. Many, if not all, may already be exempt. But, those who are not exempt may qualify for exemption from overtime under the less-stringent duties tests, provided that their actual job duties meet one or more of the requirements of a particular exemption.
Review discipline policies. Executive, administrative and professional employees may be included in progressive discipline policies that are uniformly applied to everyone. As part of the disciplinary options, you may now suspend, without pay, exempt employees from 1-to-4 days without fear of losing their exempt status. View a sample policy. A well developed communications strategy should be developed for any changes in discipline policies as well as any changes in exempt status for individuals.
Update payroll system. Update the payroll system to ensure that exempt and nonexempt designations are correct, that overtime is paid when due, that bonuses paid to nonexempt personnel are paid correctly in relation to overtime, and that docking practices for exempt and nonexempt personnel are in compliance.
Comply with union contracts and state law requirements. Overtime-pay rights under existing union contracts and state law take precedence over any extension of exempt status under the revised regulation.
To be sure you have made the correct determination, you can ask the Department of Labor for guidance after outlining your specific situation. DOL is much more forgiving of those who seek advice before risking non-compliance. The Department has stressed that it wants to work with employers to reduce confusion and help them correctly classify employees. However, you will need to follow its advice if you seek it. If you choose this route, we'd be happy to help with the procedures. You can contact Jim Kyger at (703) 519-8150 for more information.
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