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New overtime rules coming

By Craig M. Brooks, Esq.

The U.S. Department of Labor has issued final revised regulations governing overtime pay. A great deal of controversy has been stirred up since the Labor Department first proposed overtime regulation changes back in March 2003. Many groups claimed the changes would deny overtime pay to many employees now receiving it. I believe the controversy far exceeds the reality of the changes, both for the changes earlier proposed and for the final regulations.

The new regulations go into effect August 23, 2004. It is important for several reasons for employers to review their pay practices. First, changes in the regulations require employers to review and update their pay practices and classifications. Second, the continuing controversy surrounding these overtime pay regulations will make many more employees aware of, and question, their rights under wage and hour law.

The Department of Labor touts the changes as a means of simplification and clarification, but I consider this a gross over-statement and misstatement. The wage and hour regulations are very difficult for the average employer to understand, and the revised regulations do not change this. They continue to be a crazy-quilt pattern of voluminous, subjective and confusing rules. Most employers do not comply with all of the rules because they are uninformed or misinformed about them.

Many myths remain about wage and hour practices, particularly amongst physician practices (e.g., some people believe many medical technologists are exempt from overtime pay but they generally are not; and many continue to believe that compensatory time off for overtime worked in a prior week is acceptable, but it is not). Because these misunderstandings are wide-spread, it is important and helpful for physician practices, as well as all employers, to review and update their wage and hour practices and policies in order to correct and avoid potential liability problems.

Whether it concerns these new regulations or any other aspect of wage and hour law, the current controversy and the attention given the new regulations will make more employees aware of wage and hour issues and more likely to challenge their pay. It only takes one disgruntled employee to call either the U.S. Department of Labor’s Wage and Hour Division or a private attorney to prompt an investigation into, and claims over, the pay practices of all your employees. Not only can a review now avoid liability, but it may also reveal less costly or otherwise attractive alternatives for paying employees. The following briefly summarizes the changes proposed in the regulations; but the equally important point of this article is to sensitize employers to the mistakes they may be engaging in and to the pay alternatives that may be beneficial to them.

Federal wage and hour law (the Fair Labor Standards Act) leaves it to the Department of Labor to provide detailed regulations on pay issues, including which employees are, and are not, entitled to overtime pay and how each group must be handled. For the most part, these regulations have not been revised in many decades. For example, the minimum salary level required for an “executive” employee has not been increased since 1975 when it was set at $155 or $250 per week (depending on whether the “long” or “short” test is used), which equates to $8,060 or $13,000 per year, respectively. By comparison, the poverty level, set in 2002, is $9,183/year for a single person and $18,392 for a family of four. More importantly and correctly, the regulations have long been criticized as being too complicated and difficult to understand. Unfortunately, they still remain too complicated and unclear.

The Department of Labor’s proposed regulatory changes include raising the minimum salary levels, revising portions of the definitions for the various categories of employees who are not required to be paid overtime, and changing various miscellaneous rules regarding the treatment of these employees. Labor unions and many politicians have vowed to seek to repeal these regulations, claiming they take away overtime pay from many employees. While there is a lot of hype about the new regulations and there are certainly items of which employers should be aware, the changes are not as sweeping or as dramatic as many media stories indicate.

The biggest change is that the minimum weekly salary required to be paid to an employee exempt from overtime pay – whether under the executive, professional, administrative exemptions or outside salesperson exemption – is increased to $455/week (or $23,660/year) effective August 23, 2004 (it is currently set at either $155 or $250/week depending on the job duties). Since most people in these categories are already earning over this amount, particularly in physician practices, the impact of this change will not be dramatic. However, the existing exemption requirements based on job duties in the executive, administrative and professional exemptions will be relaxed for persons earning over $100,000/year, which may be a benefit to some physician practices and other employers.

The final regulations contain changes in the definitions of the work duties required for an employee to qualify under either the executive, professional or administrative exemption. These are too numerous to go into in this article, but they do affect some of the details of who qualifies for exemption from overtime pay. The Department of Labor has eliminated from the final regulations its earlier proposed significant rewording of the work duties description of the administrative exemption. The administrative exemption remains the most subjective and difficult to understand exemption; and, in my opinion, the proposed and now retracted revisions did nothing to clarify or simplify the definition.

The final regulations include changes regarding employer pay policies and practices that provide some improvements and greater means for employers to avoid liability, particularly inadvertent violations. For example, restrictions on unpaid disciplinary suspensions will be relaxed somewhat. Also, correction of errors after the fact is clarified for avoiding unintended employer liability.

Employers should review their pay practices and classification of employees as a result of the new regulations because there are various minor changes that could impact some positions or individuals. Just as importantly, these changes serve as a reminder to not overlook what is one of the more confusing and little understood areas of employment law.

Wage and hour law affects every employee, every day. Yet, because of the confusing definitions and myriad of rules involved many employers do not understand the pay requirements, not only for which employees are required to be paid overtime and which do not have to be paid overtime, but in many other areas also such as how to pay for travel time, training time, on-call time, meal periods, break time, etc.

Since the new regulations are attracting greater attention to pay issues, the number of employee claims will increase. Employers can avoid this potential liability through review and knowledgeable advice. In addition to correcting problems, a proper review can uncover attractive alternatives that are already available and remain under the new overtime pay rules, with many employers unaware of these options.

Craig M. Brooks, Esq., is a director with the law firm of Houston Harbaugh, P.C. in Pittsburgh, practicing in the area of employment law.

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