WHAT’S NEW IN THE LAW?

In late August 2004, new federal rules on overtime pay went into effect when the Department of Labor issued revised regulations for overtime and exemptions under the Fair Labor Standards Act.  The changes are both historic and sweeping.  The last major revision to the rules was 1949, 55 years ago.  Many of the jobs discussed in those old regulations such as “straw bosses,” “gang leaders,” and “legmen” no longer exist, just as many of the professions and positions now in question, like computer programmers, could not have been imagined in 1949.

The new regulations cover some 500 pages, but are considered a “simplification” over the previous rules, comprising less than half the length of the former regulations.  The impact of the new regulations remains hard to predict.  According to the Department of Labor, 1.3 million workers will now be eligible for overtime.  The Economic Policy Institute, however, asserts that 6 million workers will lose their right to overtime under the new rules. 

In any event, the stakes are significant.  In 2003, regulators collected a record of $212.5 million in back wages for employees from employers who violated the wage and hour laws, a 20% increase from 2002.  In 2001, a California jury ordered Farmer’s Insurance Exchange to pay $90 million for failing to pay time and a half to its insurance adjustors.  Many other major employers, such as Wal-Mart, Home Depot, and Starbucks are facing litigation.

What are some of the most significant changes? 

·                    To be exempt from overtime, the employee must be paid a set salary of at least $455 per week, or $23,660 per year.  Under the prior regulations the minimum salary was $155 a week or just over $8,000 annually.

·                    Employees earning $100,000 annually will now generally be exempt.

·                    Any employee who has a 20% equity interest in the business by which he is employed and who is actively managing the enterprise is considered an exempt executive.

·                    Executive employees who meet the minimum salary of $455 per week will be exempt from overtime if their primary duty is management related, they customarily and regularly direct the work of two or more employees (or their part time equivalents) and if they have authority to hire or fire or make suggestions and recommendations as to the hiring, firing, advancement, promotion or other change of status of other employees as long as those recommendations are given particular weight.  Under the prior rules, they were required to have the actual authority to hire and fire.

·                    Administrative employees will be exempt if they meet the salary minimum of $455 per week and their primary duty is office or non-manual work that directly relates to management policy or the general business operations of their employer or the employer’s customers, and includes work that requires the exercise of discretion and independent judgment with respect to matters of significance affecting the employers’ business.

·                    Professional employees will be exempt if they meet the minimum salary of $455 per week and their primary duty requires knowledge of an advanced type (defined as work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment) in any field of science or learning which customarily is acquired by a prolonged course of study or specialized intellectual instruction, or if their primary duty involves work that requires invention, imagination or talent in a recognized field of artistic or creative endeavor.

·                    Other significant exemptions, such as computer employees and outside sales people, have also been impacted by the new regulations.

Although the regulations provide for certain generalizations, careful analysis on a case-by-case, fact-by-fact basis should still be followed.

Even assuming that an employee might be exempt from overtime, employers must also be cautious in their treatment of those employees so as not to destroy the exempt status.  For example, if an employer docks the salary of an employee who is otherwise exempt for taking off several hours to attend to personal business, that employer has now lost its claim to exempt status and converted the exempt employee to an hourly non-exempt employee.  More significantly, all similarly situated employees might also now be deemed to be non-exempt.

Employers must also be cautious as to the classification of individuals as employees versus independent contractors.  Improperly classifying an employee as an independent contractor could likewise expose the employer to significant liability for overtime compensation as well as other benefits.

Even apart from the impact of the new regulations, state law must be considered.  Although generally Arizona has no statutory scheme imposing overtime, employers with multi-state operations must carefully examine state law to determine the impact, if any, each state’s statutory scheme will have an overtime obligations.  Eighteen states, including California and Illinois, have their own overtime requirements which preempt federal law.  Failure to comply with state law may again lead to significant liability. 

For more information, please feel free to contact us.

Previously posted articles:

"Lawyers without Borders"

Handling financing issues

Representing the developer in the formation of and financing through a community facilities district