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New OT rules: countdown to compliance

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in HR Management,Human Resources

The long wait is over. Now it's time for you to act.

More than a year after proposing changes to the rules that define which employees are eligible for overtime pay, the Labor Department issued final rules in April.

As a result, you should be analyzing each white-collar position in your organization to see how it fits under the new Fair Labor Standards Act (FLSA) definitions of "exempt employees" (not eligible for overtime) and "nonexempt employees" (eligible for overtime). The new rules are scheduled to take effect Aug. 23.

Don't play "chicken" with Congress. Still, opponents of the new rules aren't giving up. They succeeded in early May in winning passage of a Senate amendment that would block the new rules from taking effect. But that amendment still requires approval of the House and the president, which is highly unlikely.

As a result, you shouldn't take a "wait-and-see" approach on these rules. Continue to plan as if they are a sure thing. It's a safe bet that they'll survive the heat of congressional challenges and take effect, as scheduled in August.

What will change? The new rules redefine the "salary test" and the notoriously confusing "duties tests" that you use to decide which employees are exempt from the FLSA. With these clearer rules, it should be easier to decide who is due over?time and who is exempt, which should reduce your legal risks and HR costs. The downside: But you could be forced to shell out more overtime pay to lower-paid professional workers.

The final rules include several employee-friendly changes from the proposed regulations that Labor floated in March 2003. The key points of the new rules:

Salary threshold raised to $23,660. Employees earning less than $23,660 annually (or $455 a week) now automatically qualify for overtime pay.

That change alone will convert 1.3 million workers from exempt to nonexempt status, says the Labor Department. Plus, it will add up to $375 million a year to U.S. employers' payroll costs. (Labor's proposed rules called for a $22,100 salary threshold. Existing law sets the salary threshold at a ridiculously outdated $8,060.)

New exemption category for "highly compensated" employees. Essentially, this new rule says that any employee earning more than $100,000 a year and who regularly performs even one of the exempt duties of an executive, administrative or professional employee will be precluded from earning overtime. Result of this new category: About 107,000 well-paid professionals could become ineligible for overtime pay.

Duties test revised. Employees who meet the new salary test and are paid on a "salary basis" also must meet one more test, the so-called "duties test", to be considered exempt. The final rules simplify the horribly outdated duties test for people performing white-collar executive, administrative and professional jobs.

These rules mark the most sweeping modernization of federal overtime law in more than 50 years. Confusion over the exempt/nonexempt issue has sparked a record number of overtime-related lawsuits in the past few years.

Note: To ease tension among union leaders, the new rules also include a section stating which employees are not covered under the white-collar exemptions and are, therefore, still eligible for overtime pay. That includes manual laborers and other "blue-collar" workers, plus police, firefighters and other "first responders."

Rules to spark more enforcement. Now that the exemption rules are being simplified, the Labor Department won't likely be very patient with organizations that violate it.

"Once these regulations go final, I think we will see more enforcement of these regulations. You will see more investigators looking at these," Tammy McCutchen, chief of the Labor Department's Wage and Hour Division, told a recent gathering of HR people. "I encourage you to correct mistakes now."

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