New “FairPay” Rules under the FLSA

April 22, 2004

Summary
The United States Department of Labor issued its first substantial changes to the regulations governing the Fair Labor Standards Act in over 50 years on April 20, 2004. Under the Department’s new “FairPay” overtime rules, 6.7 million additional workers will be guaranteed overtime protection when the rules go into effect in mid-August. The Fair Labor Standards Act (FLSA), 29 U.S.C. 201, et seq., establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Essentially, the FLSA requires that most employees in the United States be paid at least the Federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 in a workweek. The FLSA does not, however, set forth requirements for extra pay for weekend or night work. In addition, the FLSA has no requirements for compensation for double time. Extra pay for working weekends or nights or for working double time is a matter of agreement between the employer and the employee.

The United States Department of Labor issued its first substantial changes to the regulations governing the Fair Labor Standards Act in over 50 years on April 20, 2004. Under the Department’s new “FairPay” overtime rules, 6.7 million additional workers will be guaranteed overtime protection when the rules go into effect in mid-August.

The Fair Labor Standards Act (FLSA), 29 U.S.C. 201, et seq., establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Essentially, the FLSA requires that most employees in the United States be paid at least the Federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 in a workweek. The FLSA does not, however, set forth requirements for extra pay for weekend or night work. In addition, the FLSA has no requirements for compensation for double time. Extra pay for working weekends or nights or for working double time is a matter of agreement between the employer and the employee.

A worker that is “exempt” is not covered by the overtime and minimum wage standards set forth in the FLSA. On the other hand, a worker that is “non-exempt” is entitled to the overtime and minimum wage protections guaranteed by the FLSA. Whether or not an employee is exempt from the FLSA is determined by the type of position (e.g., executive, administrative, professional, technical, clerical, and other) and the nature of the duties and responsibilities of their position. Job titles do not determine exempt status, rather exemption status is determined on the basis of whether the employee’s salary and duties meet the requirements of the regulations. However, the actual tests for determining whether an exemption exists are so confusing, complex and outdated, that often employment lawyers, and even Wage and Hour Division investigators, have difficulty determining whether employees qualify for the exemption.

Under section 13(a)(1) of the FLSA and its implementing regulations, employees cannot be classified as exempt from the minimum wage and overtime requirements unless they are guaranteed a minimum weekly salary and perform certain required job duties. Yet, the minimum salary level for the FLSA of only $155 per week was last updated in 1975, almost 30 years ago. Likewise, the job duty requirements in the regulations had not been changed since 1949 – almost 55 years ago. Clearly, the FLSA regulations were in need of an update. Based on the antiquated provisions of the FLSA, an employee earning only $8,060 per year could be classified as an “executive” and denied overtime pay. (By comparison, however, a minimum wage employee only earns about $10,700 per year). Thus, revisions to both the salary tests and the duties tests were necessary to restore the overtime protections intended by the FLSA which have eroded over the decades.

Under the new FairPay rules, the minimum salary level for exemption is increased from $155 per week ($8,060/year) to $455 per week ($23,600 per year). Thus, employees earning less than $455 per week are now guaranteed overtime pay under the FLSA. Employees earning $455 per week or more on a salary basis will only qualify for exemption if they meet a new “standard” test of duties, otherwise, they too will qualify for overtime under the FLSA. Under the new “highly compensated employee” exemption, employees with a total annual compensation of at least $100,000 are deemed exempt from the FLSA if the employee “customarily and regularly” performs an identifiable executive, administrative or professional function.

Specific exceptions remain to ensure that certain jobs and workers retain their overtime protections. For example, the FLSA does not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. Thus, for example, non-management production-line employees and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers have always been, and will continue to be entitled to overtime pay. Likewise, police, firefighters, nurses and emergency medical technicians are identified as jobs that will not lose their overtime eligibility regardless of their duties and salary.

What does this mean overall? Because of the increased salary level, overtime protection will be strengthened for more than 6.7 million salaried workers who earn between the current minimum salary level of $155 per week ($8,060 annually) and the new minimum salary level of $455 per week ($23,660 annually). Under the new FairPay revisions, workers earning between $155 and $455 per week will now be guaranteed overtime protection regardless of their duties. In addition, an estimated 5.4 million currently nonexempt salaried workers will see their overtime protection strengthened because their protection, which is based on the duties tests under the current rules, will be automatic under the new rules. Finally, an estimated 1.3 million white-collar salaried workers earning at least $155 but less than $455 per week who are currently exempt under the long and short duties tests, will gain overtime protection, as the new rules streamline and clarify the requirements for exemption.

Though the new FairPay rules will likely impose additional costs on employers in the form of implementation costs ($739 million) and payroll ($375 million annually) there is significant value in updating and clarifying the rules. The Department of Labor anticipates that the new rules will reduce future violations and save businesses at least $252.2 million every year that could be used to create new jobs.

The final “FairPay” rules are set to be published in the Federal Register within the next few days. Absent political or legal intervention, the new rules will take effect in 120 days, or mid-August. For more information, and a copy of the new regulations visit the Department of Labor’s new “FairPay” Web site: http://www.dol.gov/esa/regs/compliance/whd/fairpay/regulations.htm

If you have questions or concerns about these recent developments and their effect on your business practices, please contact us.