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David K. Haase Ross H. Friedman

You can put lipstick on pig, but guess what? It’s still a pig,” said Senator Tom Harkin, D-Iowa, of the final changes to the “white collar” overtime exemptions to the Fair Labor Standards Act (FLSA). Yet Labor Secretary Elaine Chao responded that Harkin and others who oppose the changes are engaged in a “misinformation campaign.” Despite the Department of Labor’s (DOL) April 20 issuance of the final changes to the white-collar exemptions, controversy remains, both over what the effect of the changes would be, and whether the changes will ever become effective. They are scheduled to become effective on Aug. 23, but recent activity in Congress threatens to block them. The FLSA generally requires that employees be paid overtime at 1 1/2 times their regular rate of pay for any hours worked beyond 40 in any week. The white-collar exemptions exclude certain executive, administrative, professional, computer and outside sales employees from this requirement. Generally, to be considered exempt under the white-collar exemptions, employees must meet certain minimum tests related to their job duties and be paid on a salaried basis at not less than a specified minimum amount. The “duties” tests had remained essentially unchanged since 1949, and the salary levels required for the exemption had not been changed since 1975. In March 2003, the DOL issued proposed new regulations regarding the FLSA overtime requirements. The proposed regulations generated significant controversy, with the DOL saying that about 1.3 million workers would gain overtime rights, with about 644,000 workers losing overtime rights, and opponents saying that up to 8 million employees could lose overtime protection. Apparently responding to some of the criticism of the proposed rules, the DOL issued final rules that stepped back significantly from some of the proposed rules. The DOL had touted that its changes to the “duties” tests would significantly clarify the often confusing tests. However, perhaps the biggest changes from the proposed rules to the final rules were a large scaling back of the changes to the duties tests. The DOL also slightly increased the minimum weekly salary to qualify for the exemptions, added provisions stating that workers in certain jobs are entitled to overtime and made several other changes in response to comments on the proposed rules. Changes reflected in the final regulations of April 20 The major changes now include the following: Employees who are not guaranteed a $455 minimum weekly salary ($23,660 per year) are now entitled to overtime pay, regardless of their duties. Employees who earn an annual salary of at least $100,000 are not entitled to overtime pay if their primary duty involves office work or nonmanual work, and the employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee. The “duties tests” for all of the exemptions have been simplified, as the old “long” and “short” tests have been eliminated and replaced with new standard tests. The duties test for executive employees adds a requirement of the old “long” test, that employees have authority to hire or fire other employees or make recommendations as to hiring, firing or other changes of employee status that are given particular weight, to the old requirements of the “short” test. That test requires, among other things, that an employee customarily and regularly directs the work of two or more other employees. In a reversal from the proposed rules, the duties test for administrative employees retains the requirement that employees exercise “discretion and independent judgment” in order to be exempt. However, the final rules clarify that an exempt employee must exercise discretion and independent judgment “with respect to matters of significance.” Arguably, this narrows the exemption somewhat. Also reversing the proposed rules, the duties test for learned professional employees retains the requirement that employees exercise “discretion and judgment” in order to be exempt. The new professional exemption defines “knowledge of an advanced type” as “work that is predominantly intellectual in character and which includes work requiring the exercise of discretion and judgment.” The duties test for computer professionals has been standardized, eliminating the current differentiation of higher-paid computer professionals. A new executive exemption has been created for 20% owners of a business if they are “actively engaged” in the management of the business. Employers are now permitted to dock exempt employees for full-day absences for disciplinary reasons without defeating exempt status. The safe-harbor provisions for improper deductions have been expanded, allowing employers with written policies against improper deductions that are disseminated to employees to avoid, in most situations, losing the exemption for a class of employees. The new regulations also specify that police, firefighters, paramedics and employees in certain other jobs are entitled to overtime. It seems that it will now be more difficult for an employee to be classified as an exempt executive employee, but there is substantial disagreement over whether the changes will expand, constrict or be neutral with regard to the administrative and professional exemptions. The DOL claims that with the scaling back of the final rules, only about 107,000 workers will lose their right to overtime, and claims that 6.7 million workers will have their overtime rights strengthened. However, Harkin and others disagree. Karen Dulaney Smith, a former investigator with the Labor Department, told a congressional committee that some of the wording in the 500-plus pages of the final changes “artfully weakens” the current rules in “subtle, but significant ways.” Smith claims that middle-income workers, such as “team leaders,” working supervisors, financial service employees, insurance claims adjusters, funeral directors and registered nurses could lose overtime eligibility under the new rules. On May 4, the U.S. Senate passed an amendment to a bill currently pending in both the Senate and the House. Known as the “Harkin Amendment,” it would make any DOL rule issued that had the effect of eliminating overtime protection for any worker invalid. Thus, while accepting the increase in the minimum salary requirements, and any other change beneficial to workers, it would nullify any change that would cause a worker to lose overtime protection. If it becomes law, this would increase the number of employees eligible for overtime. It also would increase the complexity of the rules, requiring analysis under both the former and new regulations to determine eligibility for overtime pay. State laws may provide additional protection The FLSA has been interpreted as creating a “floor” of protection for employees, allowing states to create greater protections. Currently, most states have statutes entitling employees to overtime pay, with many provisions, such as the white-collar exemptions, being similar to the FLSA. Employees can recover overtime pay through a claim under the FLSA or the relevant state statute. Employers should confirm that their policies and classifications comply with both the FLSA and applicable state law. For example, on April 2, Illinois Governor Rod Blagojevich signed legislation making Illinois the first state specifically to reject some of the DOL’s changes, even before the changes were finalized. Illinois law now states that an employee is exempt if he or she is employed in an executive, administrative or professional capacity, as those terms were defined under the old “duties tests.” But the new Illinois law adopts the minimum salary levels of the new FLSA regulations. Thus, an employer in Illinois faces a situation similar to that presented by the proposed Harkin Amendment. At least arguably, an employee in Illinois who was entitled to overtime pay under the prior regulations has an overtime claim under Illinois law, and if the employee meets the definitions under the new regulations, he or she has an overtime claim under federal law. The practical effect is twofold. The number of employees entitled to overtime pay is increased, and the complexity of an employer’s analysis of how to comply with all applicable laws also is increased. The final regulations will become effective on Aug. 23, unless federal legislation to the contrary passes. Therefore, employers should identify the state law(s) applicable in their businesses and identify the appropriate changes, re-examining the classification of their employees as exempt or nonexempt. Employers have an opportunity to correct existing erroneous classifications, for while such a correction typically raises a “red flag,” inviting a claim by the affected employee, reclassification in the context of complying with the new regulations could be less conspicuous. Also, employers should develop and disseminate policies regarding improper docking of pay, in order to take advantage of the new safe-harbor provisions. Employers, having identified the appropriate changes, may wish to hold off on implementation until near the Aug. 23 deadline, to avoid the need for two rounds of changes if legislation changing the regulations passes. David K. Haase is a partner and co-chairman of the labor and employment practice at Chicago’s Jenner & Block. Ross H. Friedman is an associate in the labor and employment practice at the firm.

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