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Firms often are oblivious to the law when it applies to them. And that’s not surprising given its intricacies, especially laws such as the Fair Labor Standards Act (FLSA), which determines who gets overtime and who doesn’t. On March 25, the U.S. Department of Labor (DOL) issued new regulations minimizing the first category and maximizing the second. While these still are just proposals, their adoption is a done deal since the Bush administration and businesses support them and the DOL can issue the regs as it sees fit. When adopted, we hopefully will end up with Power Point simplicity, instead of the current Rubik’s Cube complexity. What does this mean for firms? Let’s start with a few basics. The presumption is that all employees receive overtime pay, unless they fall within one of three exemptions: executive, professional or administrative. The new regulations do not change this, nor do they change FLSA’s most drastic remedy: Owners or managers can be personally liable for unpaid overtime. But the regulations will provide firms with a chance to convert non-exempt employees to exempt, create job classifications that are exempt and revamp their salary structure. Let’s look at the administrative exemption, which, under the old regulations, was confusing because most employees doing what firms think of as administrative tasks were not exempt. The new regulations clarify who is covered by the administrative exemption. First, they give an illustrative list of jobs suitable for this exemption: finance, accounting, purchasing, advertising, marketing, personnel management, human resources and employee benefits. The old regulations — 29 Code of Federal Regulations — said an employee was administratively exempt if his “primary duty” was “performing office or nonmanual work related to the management or general business operations [of the firm].” While the new regulations keep this requirement, they add a pro-employer provision that these employees need only hold “a position of responsibility” and no longer need to be invested, as the old regulations required, with “discretion or independent judgment” in doing their jobs. Because an employee can hold a responsible position without exercising discretion, the number of those covered by administrative exemptions will rise. To meet this new “position of responsibility” requirement, an employee must either 1. perform work of substantial importance or 2. be an employee with a high level of skill or training. We love the disjunctive; it lets firms maximize their running room. “Substantial importance” includes the following: formulating or interpreting management policy; providing consultation and expert advice to management; making or recommending decisions that have a substantial impact on business operations or finances; drawing conclusions and recommending changes; and handling complaints or resolving grievances. The second alternative “high level of skill or training,” would expand the administrative exemption to employees who perform administrative functions, even if they must use a procedures manual to do their jobs, so long as some level of interpretation is required. Small changes, yes, but with seismic effects. The expansion of the administrative exemption will allow firms (we’ll get to whether it’s a good idea in a minute) to classify a variety of functions — from human resources to accounting functions — as exempt. The focus will be on whether the employee performs work of substantial importance. While not specified in regulations, the DOL and the courts look to reality, not fiction. So, if the firm invests someone with the requirement of performing work of substantial importance, then the firm has to act consistently. Employees must be listened to (although the firm doesn’t need to take their advice), as well as reviewed on their annual performance ratings on how well they perform these functions. AVOID MORALE PROBLEMS Now, let’s turn to the professional exemption. The regulations do not change the professional exemption as it relates to lawyers; any employee who holds a valid license or certificate permitting the practice of law and actually engages in the practice doesn’t have to be paid overtime. What the regulations do change, though, and what they recognize as a fact of modern life, is that not all knowledge comes from a textbook. So, a professional employee now can be someone with a combination of formal education and real life experience. The comments to the regulations even label these employees as “knowledge workers.” According to the regulations’ explanations, 21st-century workers often acquire advanced knowledge through a combination of formal college-level education, training and work experience, even where other employees in their field customarily acquire advanced knowledge by obtaining four-year college or advanced degrees. The regulations say the test is this: Employees who get their advanced knowledge by taking some college courses and who work in their chosen field for several years are exempt if the acquired knowledge plus schooling equals a four-year degree. It has been the trend for sometime for firms to promote from within. Therefore, many firms have accounting, finance and administrative staff who do not possess a four-year degree yet do possess the equivalent knowledge gained from years of experience. Now they may qualify as exempt. Speaking of the 21st century, firms increasingly are hiring employees for their information technology (IT) sections. The regulations provide a loophole for employers with regard to IT professionals. Currently, the firm does not have to pay computer employees overtime if they make at least $27.63 per hour and have as their primary duties performing work requiring theoretical and practical application of highly specialized knowledge of computer systems, analysis, programming or software engineering, and consistently exercise discretion and judgment. The new regulations drop the discretion and judgment requirement — a big plus if the firm wants to convert the computer staff to exempt status. Finally, there is one huge, new exception for highly compensated employees. If an employee is paid $65,000 or more annually and performs nonmanual work, she can be treated as exempt even if she doesn’t meet all the requirements for exemption. So, an employee who supervises two or more workers but does not participate in hiring or termination decisions will be exempt because the employee has at least one function that is identifiable as an executive one under the regulations. Similarly, you get to use the administrative exemption if the employee is paid $65,000 a year and only performs one duty under the administrative test, such as performance of office or nonmanual work related to the management or general business operations of the employer. Let’s finish with a story. A famous rock star, renowned for dating innumerable models and actresses, was asked why he did so. Without missing a beat he declared: “Because I can.” Not good advice for a relationship, and even worse advice in deciding whether to treat employees as exempt. Here are a couple of thoughts. First, don’t have a knee-jerk reaction of using the regulations as a way to cut down on overtime expenses. It could be that the firm’s employees are racking up overtime because they work inefficiently during the week. Look for internal solutions first before resorting to the law. Second, make sure that the firm’s job descriptions are consistent not only with what the regulations require to show exempt status, but that they are accurate. As Mark Twain said, “It’s not what you don’t know that hurts you, it’s what you think is so that isn’t.” It’s conceivable that those on the firm management committee who approve job descriptions don’t truly know what goes on in the front lines of the firm. Job descriptions should reflect accurately the job and its expectations. Third, a firm should think long and hard before it tries to convert somebody from non-exempt to exempt. The days when employees thought of exempt status as a badge of honor are as outdated as Poodle skirts and skinny ties. If employees have come to see overtime as a perk of a job, a firm may have one tough morale problem. Fourth, evaluate all new and old positions whenever there is turnover. This may be the best time for a firm to reduce cost and increase efficiency by accurately classifying the position. These regulations may give firms what they need most: a way to pay employees fairly while trying to achieve maximum productivity. Maybe a firm can have its cake and eat it too. Michael P. Maslanka is chairman of the labor and employment section at Dallas-based Godwin Gruber, and writes the Texas Employment Law Letter, which can be accessed at www.HRhero.com. Candice Evalenko is the chief financial officer at the firm. Maslanka’s e-mail address is [email protected], and Evalenko’e e-mail address is [email protected].

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