Decoding the New O.T. Rules

RH Staff

By Phillip Perry

Who gets paid overtime? If you're like most employers, that question has caused you more than a few sleepless nights. After all, lots of money rides on the answer. Load up the hourly gravy train and you end up bloating your payroll and eroding your profits. Exempt the wrong people, though, and you face a worse risk: costly litigation for back pay from employees claiming misclassification.

No wonder employers often feel caught between red ink and a lawsuit. Is there a solution? Maybe so: New overtime regulations from the U.S. Department of Labor bring some clarity to what has long been a woolly patchwork of regulations.

The new rules, which took effect last August, seem to be a mixed blessing. On one hand, it looks as though more lower income workers will be eligible for overtime. That means you may well be paying out more in wages under the revised regulations. On the other hand, the extra expense may be more than offset by a decline in legal expenses. Because the new regulations are somewhat clearer about what types of employees must be granted overtime, the number of "wage and hour lawsuits" is expected to decrease.

Three Key Changes
The complete regulations are long and complex (see the "For More Information" box on p. 74). You should be aware, though, of three provisions. The first two are expected to add substantially to the rolls of employees eligible for overtime; the third is expected to moderate that number slightly:

1. The new rules mandate overtime for all workers earning less than $455 per week (which translates to $23,660 annually). This three-fold increase from the former threshold of $155 is expected to increase the number of nonexempt workers by some 6.7 million.

2. Workers earning more than $455 weekly and less than $100,000 annually are subject to protections from loss of overtime pay, under standard "duties tests" equal to or more protective than former tests. This provision, then, should also increase the number of nonexempt workers.

3. Employees who earn more than $100,000 in annual pay are subject to a new set of "duties tests" less protective than the ones for the middle tier of workers. This provision is expected to result in some 107,000 highly compensated employees losing overtime protection.

You must take action quickly to make sure you comply with the new regulations. "Most employers are looking at jobs now and auditing their positions," says Joseph Harkins, a partner at Washington, DC-based Littler Mendelson, the nation's largest employment law firm. "It's important to do this and make adjustments where required."

Delay too long and you can get hit with costly financial penalties from two sides. First, employees may sue you for misclassifying them as exempt from overtime, leading to back wage settlements. Second, you may be hit with government fines. "If you do not comply with the new rules, you could be penalized for any overtime that the department of labor believes you should have paid to employees," says Timothy Bland, a partner in the Memphis office of Ford & Harrison, a law firm that defends businesses in employmen matters. "You can also be assessed liquidated damages fines totaling double the back pay you are deemed to owe misclassified employees."

In either case, it's clear from these comments that the longer you wait, the greater the potential financial damages. Be aware that your investigation may uncover instances of what attorneys call "task creep." This refers to the gradual modification in the duties performed by an employee, so that a formerly exempt individual becomes nonexempt, or vice versa. Task creep can occur unnoticed, and it can lead to serious misclassifications.

Payroll May Increase
How will the regulations affect your payroll costs? If you are like most employers, it will mean more money spent for wages. Your own experience, though, will depend on your location and current wage structure. "This law will impact employers very differently depending on where they live," says Robert D. Lipman, managing partner at the employment law firm Lipman & Plesur, Jericho, NY. "The biggest impact may be felt in rural areas where employees may earn less than $455 but still have a fair amount of responsibility." Smaller employers in general may be more affected since they may have a greater percentage of employees who might not meet the minimum salary test under new rules.

The effect may be mollified in some cases by a reduction of overtime eligibility by individuals who earn a salary higher than the legislation's 'highly compensated" upper threshold. If an employee makes $100,000 a year and the person's "primary duty includes performing office or non-manual work," the employer only has to justify exemption by showing that the employee "customarily and regularly performs any one or more of the exempt duties" as specified in the regulations. "This will impact those employers who have hourly jobs near the upper threshold," says Harkins.

You are most likely to come to grief trying to classify people with earnings that are over $455 weekly but below the amount deemed highly compensated. "Most employees fall in between the lower and upper thresholds," says Harkins. "Employers are struggling to figure out where these individuals fit."

Unfortunately, the new guidelines are not much help. "While the law is slightly different in wording it is basically similar to the old one," says Harkins. "You must still deal in vague terms such as 'independent judgment' and 'discretion,' and 'responsibility to hire and fire.'"

You and your attorney will need to reference the complete law that defines terms, describes details and provides real-world examples. Here, though, are some key points that will assist you when talking with your attorney.

The Department of Labor has stated that you may classify as exempt from overtime certain employees whose workplace activities "primarily involve executive, administrative or professional duties." Most readers of this magazine will be concerned with the first two categories. In addition to the salary tests described earlier in this article, exempt individuals in these categories must meet the following "duties tests":

For an executive employee: The "primary duty" of this individual must be the "management of the enterprise." Additionally, this person must be one who "customarily and regularly directs the work of two or more other employees." Finally, this individual must either have the authority to hire and fire other employees, or offer suggestions and recommendations for such personnel actions that carry "particular weight."

Smaller employers may need to take a close look at their operations to see if their assistant managers remain exempt under these guidelines—particularly in light of the fact that these individuals must be supervising two full-time employees.

For administrative employees: This person's "primary duty" must be "the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers." Additionally, the primary duties must include the "exercise of discretion and independent judgment with respect to matters of significance." You may already be relying on the administrative exemption for personnel who are not managers but who are critical to your operations. Unfortunately, the language of the new regulations adds little or no clarity in this area. "We had hoped that the administrative exemption would be cleared up and made easier to apply," says Bland. "That's not the case." Just how much "discretion and independent judgment" has to exist to meet the duties test is extremely difficult to apply in the real world. "Some employees have very little discretion in the job and are obviously not exempt," says Bland. "A few have so much discretion they clearly are exempt. But most employees by far fall into a grey area, so it comes down to a judgment call."

Be aware that the above paragraphs provide only a sketch of the picture, the shading and color of which you and your attorney must complete. They do, however, provide a basis for discussion.

Define Your Terms
The new regulations attempt to define the key terms used in analyzing personnel exemptions. For example, the rules provide a long list of activities that constitute "management" and what factors constitute "particular weight" for determining the exemption of executive employees. For administrative exemptions,the regulations attempt to define phrases such as "discretion and independent judgment" and " directly related to management."

Reiterating such definitions is beyond the scope of this article and must be done in conjunction with your attorney to analyze the particular status of your personnel. One term, though, is particularly important because it pops up in all of the duties analyses. That is "primary duty."

The term primary duty has been expanded from the time spent on exempt work to the perceived value of exempt work. The new regulations have discarded the old rule that an exempt individual could not spend more than 20 percent of time on nonexempt work. Indeed, it is not even necessary that an individual spend more than 50 percent of work time on a duty for that activity to be deemed "primary." Rather, the determination must be made on a caseby-case basis, taking into account such matters as "the relative importance of the exempt duties" and "the employee's relative freedom from direct supervision" and wage disparities between the individual and nonexempt employees.

An employer might claim that many nonexempt tasks an employee performs are in support of exempt tasks. By way of example, an administrative assistant might be doing a lot of clerical tasks that all support getting vendor agreements in order. This person might well be classified as exempt.

At what point does the performance of nonexempt duties threaten exempt status? There is no cut and dried rule. As guidance, the regulations state that "exempt executives make the decision regarding when to perform nonexempt duties and remain responsible for the success or failure of business operations under their management while performing the nonexempt work."

Given the number of people in the muddled middle and the vagueness of the applicable duties tests, it's clear you will need to engage in serious analysis to avoid noncompliance penalties.

When facing ambiguity, many employers are taking the "better safe than sorry" option. "I do not see a lot of clients going out of their way to make hourly people salaried," says Harkins. "But I do see employers taking salaried people and putting them into the hourly category. So I would not be surprised if the new legislation increases the number of people eligible for overtime to a level even higher than what the DOL has predicted."

Now is the time to take a new look at your own employees and classify them appropriately. When in doubt, remember that the law presumes your employees are hourly-it's up to you to show otherwise. Says Harkins: "It's always legally safer to pay wages and overtime."

For More Information
For a complete copy of the new regulations, go to the special FairPay section of the U.S. Department of Labor's website (www.dol.gov/fairpay). Click on "Regulations," then the hyperlink for either web-view or PDF versions of the law. This site also offers online video seminars and fact sheets.

On the National Restaurant Association website you'll find an issue brief, a Q&A session with restaurant operators and expert commentary and an overview of the changes and how to comply.

Finally, Littler Mendelson, the nation's largest employment law firm, has posted a document to help employers understand the new legislation. Visit www.littler.com, then click on "DOL Revised White Collar Regulations."

Phillip Perry ([email protected]) is a business writer who has spent more than 20 years writing about workplace psychology, employment law and marketing.