Completing a journey worthy of Odysseus, the Department of Labor's on-again, off- again, much-debated and long-awaited revisions to the overtime pay regulations under the Fair Labor Standards Act take effect on August 23, 2004. Delayed by partisan wrangling for over a year and at various times thought to be near a political death, the changes are the first significant overhaul of the overtime pay rules in more than 50 years. These DOL regulations determine which employees are eligible for "time and a half" premium pay for hours worked in excess of 40 in a workweek, and which employees are "exempt" from the overtime pay requirements.

Organized labor has viewed the regulations as significantly weakening overtime pay protections for many workers, and even the publication of the DOL's final rule in April has not stopped Congressional efforts -- as recently as last month -- to scuttle the changes. But with the deadline for implementation now only weeks away, employers must quickly move beyond the role of spectators to a big-picture political saga, and grapple with the practical effects of the changes on their workforces.

While most employers have already taken substantial steps to ensure compliance with the new regulations, a number of industry surveys have shown many employers still struggling to come up to speed. Complicating the compliance effort is the fact that for many employers, implementing the new regulations will entail their first comprehensive review of company pay practices in decades.

The basics

The first step for an employer in dealing with the new overtime regulations is to understand what has changed, and what has not. Typically, employees are eligible for overtime premium pay (as "non-exempt employees") unless they hold positions falling within one of three "white collar" exemptions. To fit within these three exemptions -- executive, administrative, and professional -- a position must both:

1. Require the performance of particular, and typically discretionary, duties; and
    
2. Be paid on a salaried, rather than hourly, basis, though there are several notable exceptions to the "salary basis" requirement, including doctors, lawyers, teachers, certain skilled computer professionals, outside salesmen, and managers who own at least 20% of a business.

The new regulations loosen some of the standards on both prongs of this analysis. The new rules broaden in important ways the white collar "duties" tests. They also relax some of the criteria for determining whether a position is truly paid on a "salary basis" (generally, payment of a predetermined amount for a workweek, which does not vary based on the quality or quantity of work performed) or is instead, effectively, compensated by the hour.

The duties tests

• Executive Employees - As under the current regulations, an "executive" employee must have as her "primary duty" the management of an enterprise, or a customarily recognized department or subdivision of the enterprise. The "primary duty" test, however, has been made significantly more flexible, both for "executive" positions and for "administrative" and "professional" employees. First, while duties that involve more than half an employee's time will still generally be considered "primary," the new regulations provide greater leeway for a finding of exempt status even where less than 50% of the employee's time is taken up with exempt functions. Second, under the new regulations, non-exempt tasks that are "directly and closely related" to an employee's exempt responsibilities may now be counted as exempt work, in determining the employee's "primary duties." The standard for what constitutes "management" duties has also been expanded, as has the definition of a customarily recognized "department or subdivision" of an enterprise. As a result of these changes, a number of employees who were previously just outside the "executive employee" exemption should now be safely within it. Nonetheless, even under the new regulations, not every "manager" or supervisor will necessarily be an "executive."

• Administrative Employees - "Administrative" employees must have as their primary duty the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers, and those primary duties must include the exercise of discretion and independent judgment with respect to matters of significance (because of the "discretion and independent judgment" requirement, there are many "administrative" employees in every organization, including most "administrative assistants," who are not covered by the "administrative" exemption, and who must be paid overtime premium pay). While this duties test is largely unchanged under the new regulations, the number of positions likely to meet the test has increased.

The new regulation's examples of the types of positions which may be treated as "administrative," and of the kind of work properly viewed as involving "discretion and independent judgment," both suggest a broader compass for this exemption. As well, several existing criteria have been dropped under the new regulations. These included the requirement that an administrative position must either directly assist another exempt employee, or perform special projects under only general supervision, and the requirement that "discretion and independent judgment" be exercised "consistently" or "customarily and regularly."

• Professional Employees - "Professional" employees must have as their primary duties work requiring knowledge of an advanced type, work in a field of science or learning, or work customarily acquired by a prolonged course of specialized intellectual instruction. In addition to loosening the "primary duty" test (as discussed above), the new regulations make clear that occupations whose educational prerequisites involve three years of non-specialized college instruction and a fourth year in an accredited specialized program will generally be exempt.

• Highly Compensated Employees - The DOL regulations also create an entirely new class of exempt employees: those with a total annual compensation of at least $100,000. So long as these employees customarily and regularly perform at least one of the exempt duties of an executive, administrative or professional employee (even if that duty is not their primary duty), they may be treated as exempt. At least $455 per week of this compensation, however, must be paid on a salary or fee basis; the balance may be in the form of commissions, non-discretionary bonuses and other non-discretionary income.

Salary basis of payment

The new regulations maintain the current definition of a salary basis of payment (a fixed amount not subject to reduction or increase based on quality or quantity of work performed). The regulations also generally continue the current rules concerning the deductions from salary that are permitted, and the deductions from salary that destroy a "salary basis" of payment. But the regulations broaden the scope of permissible deductions in a number of respects. These include partial day deductions for suspensions for infractions of major safety rules (previously, only full day suspensions were permitted). Also permitted for the first time are deductions for disciplinary suspensions for one or more full days for infractions of workplace conduct rules (even ones not involving safety issues), pursuant to a written policy applicable to all employees (under the old rules, non-safety related suspensions had to be meted out in full week increments to exempt employees, or not at all). The new rules provide a "safe harbor" to protect employers against loss of exemption on account of impermissible reductions in salary pay, if the employer has a clearly communicated policy prohibiting improper deductions, reimburses employees for any improper deductions, and makes a good faith effort to comply in the future after an improper deduction has occurred.

The new rules also confirm several practices for salaried employees which previously had been viewed with some suspicion: deductions from accrued leave balances for partial day absences will not destroy the salary basis of payment, nor will requiring employees to record or track hours, or to work a specific schedule. Likewise, providing extra compensation, in addition to a guaranteed minimum salary, will not remove exempt status.

The minimum salary necessary to support exempt status is increased, from $250 under the old regulations to $455 per week under the new rules. For most employers in Massachusetts, however, this change (to a new annualized minimum salary of $23,660) will not often impact the treatment of positions otherwise meeting the standards for exempt status.

What employers should do

In light of the new regulations, each employer should take the following steps:

• Review your classification of all exempt and non-exempt employees - if every employee in your organization is treated as exempt, or if an overwhelming majority of them are, this may be a red flag; just because your employees act very professionally, that does not mean they are all "professionals" under the FLSA;
   
• Revise or adjust formal job designations as appropriate - job descriptions that have the characters "Rev. 7/73" at the bottom, or that include as a duty "provides routine maintenance for mimeograph machine," probably needed to be revised anyway, and this would be a good time to do it;
   
• Adjust compensation of lower-paid employees, if necessary and advisable, to bring them within the scope of the revised exemptions (but make sure that the size of a salary increase is not more than what you would have paid in overtime premium pay to begin with);
   
• Adjust compensation of higher-paid employees, if necessary and advisable, to come within the scope of the new exemption for highly compensated employees (but again, only if it makes economic sense to do so);
   
• Consider the adoption of written workplace conduct rules applicable to all employees, in order to be able to suspend exempt employees for non-safety related workplace misconduct;
   
• Consider adopting a policy concerning improper deductions from the salary of exempt employees.
   
• Talk to your attorney for specific guidance particular to your organization, especially before changing a formerly "non-exempt" position to exempt status. And remember that state law can provide greater protections than does the FLSA; for example, workers providing certain home-based "companionship" services have long been treated as exempt by the Department of Labor under federal law, but (according to the Massachusetts Attorney General's office) still must be paid overtime premium pay under the Massachusetts wage and hour statutes.
   
• And, while you're at it, Take a look at your existing pay practices in light of FLSA "traps for the unwary" which the new regulations have left unchanged. The most common of these -- failing to pay for covered travel time, providing "compensatory time off" instead of required overtime premium pay, failing to aggregate hours worked for two or more related employers, counting only base pay in calculating the "time and one-half" overtime premium, paying non-exempt employees with a flat rate or lump sum payment instead of the "time and one-half" rate, ignoring "small amounts" of overtime and other time card inaccuracies, and failing to pay for time worked by employees who start early, stay late or work through lunch -- all continue to pose significant risks to employers, even under the new regulations.

Conclusion

Remember, the overtime law changes take effect immediately -- today! Those organizations that are mindful of these revisions, and take the necessary steps outlined above to ensure compliance with the amended regulations, will be well-prepared to cope with the FLSA changes and the new overtime environment.

FOR MORE INFORMATION Department of Labor FairPay Overtime Initiative site The official DOL site designed to help employers understand the Department's new FairPay rules that strengthen overtime protections.

Peter Ebb is a partner in the Boston office of Ropes & Gray LLP, practicing in the firm's Labor & Employment Department, and is also a NEHRA member. Peter can be reached at or at (617) 951-7457.