Employment

Labor Department Overhauled Overtime Regulations

The Department of Labor issued new overtime regulations for the first time in 50 years that became effective in 2004. The Fair Labor Standards Act (the “Act”) requires that overtime be paid for non-exempt employees at a rate of time and half regular pay for all hours worked over 40 hours in a week.

The Act includes several exemptions. Exempt employees are those who need not be paid overtime. One of the more common sets of exemptions is the so-called “white collar” exemption for employees classified as executive, administrative, or professional employees. Whether an employee is classified as exempt is not solely dictated by whether they are paid by the hour or paid a salary. Just because you pay an employee a salary does not make that employee exempt from overtime pay.

Under the existing regulations, the white-collar exemptions are governed by three tests: salary basis, salary level and duties. Each of these three tests must be satisfied for an employee to be declared exempt.

Salary Test
Under the new regulations, the salary test is increased from $170/week ($7,440 per year) to $455/week ($23,660 per year).

Duties Test
Under the existing regulations, the so-called “duties” tests are complicated and include both a short and long test. These generally evaluate the type of work being performed, whether it is more managerial or supervisory in scope and degree, whether discretion and independent judgment are exercised, whether an advanced degree is necessary, and similar concerns related to determining whether the employee is a “white collar” worker.

Under the new regulations, the “duties” tests are still complicated. Common concepts include managing or performing work requiring advanced knowledge, exercising discretion or independent judgment, supervising 2 or more employees, and having authority to make substantive decisions such as hiring or firing recommendations.

It is important to understand that no definite conclusions can be drawn simply by reference to job titles or industries. In wage and hour law, job titles and descriptions are not controlling. The Department of Labor will look at the actual jobs being performed.

Possibly not eligible for overtime under the new regulations

Certain classes of employees may be at risk of having their status adjusted now to be exempt. These include insurance adjusters and employees in the financial services industry who will all probably qualify for the administrative employee exemption.

A number of employees now eligible for overtime may lose their eligibility by adoption of a new “highly compensated” employee exemption. This covers those making $100,000 or more who perform office work and perform at least one function of an executive, administrative, or professional employee.

Possibly eligible for overtime under the new regulations

Other classes of employees have been exempted from application of the white-collar exemptions. These include police officers, fire fighters, other emergency first responders, park rangers, state troopers, correctional officers, and parole officers. The final revised regulations protect military veterans who may have gained specialized education through their service-related training.

How will regulations affect Arizona?

If the new regulations work as intended, the regulations will reduce costs associated with wage and hour compliance, thereby helping small businesses. The old regulations are a patchwork quilt of outdated rules many of which were first put into place in the 1940s. The new regulations are an attempt to do that and bring the “white collar” wage and hour exemptions into the 21st Century. Arizona has a large number of service industry employees. Many of these will now qualify for overtime, which may not have been qualified under the prior salary tests. Arizona has a large health care related industry and a high percentage of military veterans. Workers in these fields should retain overtime eligibility in most cases.

Practical advice for any employer or employee

It is never a bad idea for an employer to have its wage and hour practices audited. Periodic review is the best way to prevent small problems from becoming major problems, and is an excellent risk management practice.

If you would like more information, you can contact our Employment Law group at 602.248.1000 or visit the Department of Labor’s home page, www.dol.gov and click on link to Fair Pay Overtime Rules.