New FLSA Regulations: What’s all the Hubbub?

In August 2004, the Department of Labor’s (DOL) long-awaited, and often hotly debated, new regulations designed to update and clarify the Fair Labor Standards Act (FLSA) became effective. Culminating an effort begun in March 2003, the DOL action was proposed in an effort to update many outdated aspects of FLSA, as well as to increase the ease for employers, as well as the DOL itself, to properly interpret and apply the regulations of this Act. Despite a dramatically changed economy since its original adoption in 1938, FLSA regulations had previously remained largely unchanged.

WHAT is FLSA again?

As a brief refresher, the FLSA regulates employment in three primary areas:

• minimum wage rate
• payment of overtime
• child labor

The FLSA generally requires employers to pay employees at least the federal minimum wage for all hours worked, and overtime premium pay of time-and-one-half the regular rate of pay for all hours worked over 40 in a single workweek. However, the FLSA includes a number of “white-collar” exemptions from the overtime requirements, such as employees qualified as “administrative,” “executive,” “professional,” and “outside salesman.” Understanding and properly applying the often-unclear definitions for these exemptions has historically been a source of much confusion for all affected parties, spawning a continuous flow of DOL penalties, assessments and related lawsuits.

The new DOL regulations were developed and implemented in an effort to provide much-needed clarification as to which employees are eligible for exempt status. The minimum Federal hourly wage rate (currently $5.15/hour), requirement to pay overtime to non-exempt employees, and child labor provisions were unaffected by these changes.

WHAT really changed?

Under existing FLSA regulations, there are three requirements for an employee to be considered exempt from overtime – all three of which must be satisfied. They are:

1. a certain minimum level of weekly pay (the “salary level test”)
2. paid on a salary, rather than an hourly, basis (the “salary basis test”)
3. performance of certain exempt duties (the “duties test”)

The salary basis test remains essentially unaffected; the primary impact of the regulation changes is in the salary level test and the duties test. Among the most significant changes are:

• An increase in the minimum salary level for exemption – Previously, the Act required only a minimum salary level of $155 per week, or $8,060 annually, to satisfy the minimum pay requirement of the exemption salary test – reflecting pay levels from the mid-1970’s when the minimum salary level was last increased. The new minimum salary level is $455 per week, or $23,660 annually
• A new Highly Compensated Employees “bright line” test – The DOL created a new provision whereby any employee who does not perform manual labor, who customarily and regularly performs at least one duty of an executive, administrative or professional employee, and whose annual total compensation is equal to or greater than $100,000, is exempt from overtime pay. (Note that the compensation must still include a minimum salary level of $455 per week, per the minimum salary requirement.)
• Revisions to the duties test for both the Executive and Administrative – These two white-collar exemption categories have been revised to provide clarification of duty requirements, as well as to update and expand the list of examples provided in the regulations themselves as to correct, and incorrect, application of the tests. In many cases, this will make it significantly easier to make an exempt classification determination, while in some cases the determination may be more difficult. Certain of the changes have clarified non-exempt status for various positions, while others revisions may now open the door for an exempt classification previously not available

WHAT is the impact of these changes?

Recent surveys by human resource organizations indicate that the vast majority of organizations expect the new regulations will have little effect on current exempt classifications or pay levels. The impact on any organization, however, will be dependent upon the make-up of its employee pool and the level of previous effort to understand the provisions of FLSA and correctly apply them. For example, in analyzing the impact of the regulations, the DOL estimates that 1.3 million workers – primarily in the retail and fast-food sectors, and often in the rural South – will need reclassification from exempt to non-exempt. However, one revision/clarification in the duties tests may also lead to certain employees in these same sectors being classified as exempt, under the “concurrent performance” principle, which eliminates disqualification due solely to performing non-exempt work concurrent with otherwise-qualifying exempt work.

Will the revisions provide clarity and overall simplification? The jury is still out, but the hope by many is that the regulations will make the exempt classification of jobs, and related compliance with FLSA, easier on all concerned.