The New Overtime Rule And Application

Confusion is the word for employers regarding the new labor rules!

The new labor law, collectively known as the Fair Labor Standards Act of 2004, has been in effect since August 23, 2004. Unfortunately, most employers and employees are as confused about this new rule as they are about high-energy physics. The following will serve as a guide to help employers find where they stand in relation to the new overtime rules.

The Basic Rules
Originally, the Fair Labor Standards Act established various basic rules for employers on how to compensate their employees and whom they could employ. The rule applies to most private employers who engage in activities for profit. The original rules have seen decades of modifications in it and in the workforce. As such, Congress and the Bush administration decided to modify the old rules into a new set of rules with modern dollar amounts and words.

The basic rules, such as the rules regarding minimum wage and child labor, have not changed. The current minimum wage is $5.15 per hour according to this federal rule. Many states have higher minimum wages. In cases where the state’s law is higher than the federal law, the state’s minimum wage must be followed.

Child labor is also virtually unchanged with the new rule. Generally those under 14 cannot be employed in any capacity. Fourteen and 15 year olds are allowed to do some work. Those who are 16 and 17 have a separate set of rules. The rules allow them to do additional work as opposed to those individuals who are 14 and 15. Persons 18 and over are eligible for full work duty with some exceptions.

Rules Regarding Exemptions
The new Fair Labor Standards Act’s biggest change is in worker exemptions. Workers are generally eligible for overtime after working above 40 hours in a workweek if they are not exempt. If the workweek includes an 8-hour holiday and the employee has worked only 36 hours, that employee receives straight time for 44 hours. Otherwise, if an employee is exempt, he or she can be worked beyond 40 hours a week and receive a salary of a set amount with no overtime.

The new rule establishes a threshold test for eligible employees. It is simply whether the employee earns over $455 per week. If the employee does not earn above this amount, the employee does not qualify for salary and is eligible for overtime. However, this test does not apply to outside salespeople.

Secondly, the employee must fit into an exemption classification as described by the Department of Labor to qualify for a salary basis compensation payment. The different exemption classifications are: highly compensated, executive, administrative worker, professional, and outside salesperson.

Let’s look at each exemption from the new overtime rules:
  • Executive – This exemption has been broadened from the old definition. The primary duty must be to manage an enterprise or unit including two full-time employees. Part-time employees do not count.
  • Professional – This definition has also been broadened. A professional must do work that requires the application of advanced knowledge. The advanced knowledge can generally be gained from a bachelor’s degree, but can also be gained from experience. Occupations that were traditionally not thought of as professions now qualify for exempt treatment under this exemption. Nurses and chefs now fit the definition, which is a big change.
  • Administrative – Not much has changed in this category. The administrative duties must be related to management activities and the employee must exercise discretion and judgment in their decision process to qualify for the exemption.
  • Highly Compensated – If an employee is making over $100,000 per year, he or she qualifies as being highly compensated and is generally exempt.
  • Outside Salesperson – This has also changed. Instead of the old test of greater than 80 percent of the duties being performed away from the office, the new test calls for the outside duties being the primary duty of the salesperson. Therefore, if the employee performs 50 percent or more of his or her job away, it is primary under the new standard. Less than 50 percent can qualify in limited instances, depending on importance.
The above exemptions do not exempt pay for manual laborers such as plumbers, mechanics, carpenters, etc., regardless of the amount of pay. Additionally, this rule also does not apply to firefighters, police and other first responders. This is important, because even if these employees earn above $100,000 annually, they cannot qualify for the highly compensated test. Such workers must receive overtime pay when they work beyond 40 hours in a workweek. Additionally, those individuals who were exempt before the new law went into effect are still exempt.

State Conflicts
The new rule is a federal rule. It preempts all state rules. However, states can develop standards higher than the federal government’s. Some states are defiant, others partially defiant, and others merely go along with the federal rule.

If a state is defiant, that means its rules conform to the old requirements, i.e., exemption classification, and the state only accepts the federal rules where required, i.e., salary level. These states are California (salary level slightly higher), Illinois, New Jersey, Oregon and Pennsylvania.

If a state is partially defiant, that means generally outside salespeople must still conform to the 80 percent outside sales requirement as opposed to the new primary duties requirement. They accept the federal salary level and are split regarding exemptions. These states are Alaska, Arkansas, Colorado, Connecticut, Hawaii, Kentucky, Maryland, Minnesota, Montana, North Dakota, Washington, West Virginia and Wisconsin.

If a state goes along with the rule, that means it has a “me too” rule in place. These states accept the federal standard as their own rule. All other states not mentioned above carry this rule. However, the governor of Maine has threatened to change Maine’s state rule from a “me too” to a defiant rule.

The new overtime rules regarding exemptions can be hard to apply given the present state and federal conflict. However, with a proper analysis, nobody should find themselves in violation of the new rules.

Salary Rules and Modifications
Salary is defined as when an employee regularly receives a predetermined amount of compensation each pay period that is permitted by law. The definition itself seems to be simple and easy enough to apply to employees. However, there is a plethora of rules an employer must learn in order to be allowed to pay an employee a salary as opposed to an hourly rate.

The following paragraphs discuss the rules regarding employers’ duties when employees receive a salary. Salary is not always available for all employees.

The General Rules Regarding the Payment of a Salary to Employees
When a salaried employee performs any work during the pay period, that employee must be paid the full salary amount. This amount cannot be reduced because of quality or quantity variations of the work performed. Alternatively, when the employee does not perform any work during the pay period, there is no requirement to compensate that employee for the pay period at all. Generally, deductions are not permitted, except in a certain number of enumerated instances.

Deductions Not Allowed from Salaried Workers
If deductions from a salaried employee are taken against the salary rules, the employer faces losing the opportunity to pay that employee salary and all other employees in that job classification. Therefore, it is of utmost importance that an employer be careful not to violate the salary rules.

Deductions cannot be made for the following time:
  1. When work is not available to the employee
  2. For partial day absences to attend a meeting with school officials
  3. When the employer is closed due to weather
  4. Days off for jury duty
  5. Illness when the employer does not provide wage replacement benefits for such absences.
Isolated or inadvertent improper deductions will not result in the loss of the salary exemption if the employer reimburses the employee within a reasonable time after the error is discovered. To determine if an employer will lose the opportunity to pay salary to an employee or class of employees, the Department of Labor will look at the following circumstances:
  1. The number of improper deductions and total number of employees involved
  2. When the improper deductions were made
  3. The location of the employees
  4. Whether the employer has a clearly communicated policy of when and how deductions are applied.
Generally, the opportunity to pay a salary will not be lost if the employer has a clearly communicated policy prohibiting improper deductions and includes a complaint mechanism, reimburses the employee for any improper deductions, and makes a good faith effort to comply. If the employer does not make a good faith effort to follow the safe harbor rules and willfully violates the policies, the safe harbor will not be helpful to the employer.
 
Deductions Allowed from Salaried Workers
Even though the rules are strict regarding what is not allowed, the government has issued new rules regarding what deductions and requirements can be made without a penalty applying to the employer. They are as follows:
  1. Deductions from exempt employee’s accrued leave accounts
  2. Requiring employees to work a specified schedule
  3. Requiring employees to track their hours
  4. Schedule changes
  5. Full days due to disciplinary suspensions
  6. Personal days for other than sickness or disability
  7. Days for sickness or disability if deductions are made under a bona fide plan of providing wage replacement benefits
  8. To offset amounts received as payment for jury, witness and military pay
  9. Penalties for violating safety rules of major significance
  10. Proportionate amounts in employee’s first and last pay period
  11. Family and Medical Leave Act Days.
Department of Labor Audits
Not much has changed in this area under the new labor standards. But be aware, both state and federal agencies can audit employers’ records regarding their treatment of their employees. Audits typically happen when disgruntled employees call the Department of Labor to report a potentially illegal situation. The most typical situation is when a salaried employee believes he or she should be receiving overtime. The auditors can come announced or unannounced. At the conclusion of an audit, the agency will assess fines if there are errors or omissions that they feel were improper. If the discrepancies are unintentional, the penalties tend to be less or nonexistent. If the discrepancies are intentional, the penalties tend to be higher.

Conclusion
The mere fact that an employer elects to pay an employee salary does not automatically make salary payments legal. When an employer elects to pay salary, the employer must know the rules and proceed with caution. During the transition, employers can expect resistance from employees who were previously eligible for overtime. The average employer can expect resistance in the form of insubordination, lawsuits and resignations. Though the new rules convey minimum standards, those standards do not necessarily have to be followed in favor of an agreement that is more favorable for an employee.

This labor law is a confusing subject and employers are forewarned to obtain proper advice from qualified professionals before structuring pay rates, job descriptions and salary.

Gases and Welding Distributors Association

Bart Basi Marcus Renwick Meet the Author
Dr. Bart A. Basi is a CPA and attorney at The Center for Financial, Legal & Tax Planning Inc., based in Marion, Illinois, and on the Web at www.taxplanning.com. Marcus S. Renwick is an attorney and the director of research and publications for the firm.