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The new labor law, collectively known as the Fair Labor Standards Act
of 2004, has been in effect since August 23, 2004. Unfortunately, most
employers and employees are as confused about this new rule as they are
about high-energy physics. The following will serve as a guide to help
employers find where they stand in relation to the new overtime rules.
The Basic Rules
Originally, the Fair Labor Standards Act established various basic rules
for employers on how to compensate their employees and whom they could
employ. The rule applies to most private employers who engage in activities
for profit. The original rules have seen decades of modifications in it
and in the workforce. As such, Congress and the Bush administration decided
to modify the old rules into a new set of rules with modern dollar amounts
and words.
The basic rules, such as the rules regarding minimum wage and child labor,
have not changed. The current minimum wage is $5.15 per hour according
to this federal rule. Many states have higher minimum wages. In cases
where the state's law is higher than the federal law, the state's minimum
wage must be followed.
Child labor is also virtually unchanged with the new rule. Generally
those under 14 cannot be employed in any capacity. Fourteen and 15 year
olds are allowed to do some work. Those who are 16 and 17 have a separate
set of rules. The rules allow them to do additional work as opposed to
those individuals who are 14 and 15. Persons 18 and over are eligible
for full work duty with some exceptions.
Rules Regarding Exemptions
The new Fair Labor Standards Act's biggest change is in worker exemptions.
Workers are generally eligible for overtime after working above 40 hours
in a workweek if they are not exempt. If the workweek includes an 8-hour
holiday and the employee has worked only 36 hours, that employee receives
straight time for 44 hours. Otherwise, if an employee is exempt, he or
she can be worked beyond 40 hours a week and receive a salary of a set
amount with no overtime.
The new rule establishes a threshold test for eligible employees. It
is simply whether the employee earns over $455 per week. If the employee
does not earn above this amount, the employee does not qualify for salary
and is eligible for overtime. However, this test does not apply to outside
salespeople.
Secondly, the employee must fit into an exemption classification as described
by the Department of Labor to qualify for a salary basis compensation
payment. The different exemption classifications are: highly compensated,
executive, administrative worker, professional, and outside salesperson.
| Let's look at each exemption from the new overtime rules: |
- Executive - This exemption has been broadened from the
old definition. The primary duty must be to manage an enterprise
or unit including two full-time employees. Part-time employees
do not count.
- Professional - This definition has also been broadened.
A professional must do work that requires the application of advanced
knowledge. The advanced knowledge can generally be gained from
a bachelor's degree, but can also be gained from experience. Occupations
that were traditionally not thought of as professions now qualify
for exempt treatment under this exemption. Nurses and chefs now
fit the definition, which is a big change.
- Administrative - Not much has changed in this category.
The administrative duties must be related to management activities
and the employee must exercise discretion and judgment in their
decision process to qualify for the exemption.
- Highly Compensated - If an employee is making over $100,000
per year, he or she qualifies as being highly compensated and
is generally exempt.
- Outside Salesperson - This has also changed. Instead
of the old test of greater than 80 percent of the duties being
performed away from the office, the new test calls for the outside
duties being the primary duty of the salesperson. Therefore, if
the employee performs 50 percent or more of his or her job away,
it is primary under the new standard. Less than 50 percent can
qualify in limited instances, depending on importance.
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| The above exemptions do not exempt pay for manual laborers such
as plumbers, mechanics, carpenters, etc., regardless of the amount
of pay. Additionally, this rule also does not apply to firefighters,
police and other first responders. This is important, because even
if these employees earn above $100,000 annually, they cannot qualify
for the highly compensated test. Such workers must receive overtime
pay when they work beyond 40 hours in a workweek. Additionally, those
individuals who were exempt before the new law went into effect are
still exempt. |
State Conflicts
The new rule is a federal rule. It preempts all state rules. However,
states can develop standards higher than the federal government's. Some
states are defiant, others partially defiant, and others merely go along
with the federal rule.
If a state is defiant, that means its rules conform to the old requirements,
i.e., exemption classification, and the state only accepts the federal
rules where required, i.e., salary level. These states are California
(salary level slightly higher), Illinois, New Jersey, Oregon and Pennsylvania.
If a state is partially defiant, that means generally outside salespeople
must still conform to the 80 percent outside sales requirement as opposed
to the new primary duties requirement. They accept the federal salary
level and are split regarding exemptions. These states are Alaska, Arkansas,
Colorado, Connecticut, Hawaii, Kentucky, Maryland, Minnesota, Montana,
North Dakota, Washington, West Virginia and Wisconsin.
If a state goes along with the rule, that means it has a “me too”
rule in place. These states accept the federal standard as their own rule.
All other states not mentioned above carry this rule. However, the governor
of Maine has threatened to change Maine's state rule from a “me too”
to a defiant rule.
The new overtime rules regarding exemptions can be hard to apply given
the present state and federal conflict. However, with a proper analysis,
nobody should find themselves in violation of the new rules.
Salary Rules and Modifications
Salary is defined as when an employee regularly receives a predetermined
amount of compensation each pay period that is permitted by law. The definition
itself seems to be simple and easy enough to apply to employees. However,
there is a plethora of rules an employer must learn in order to be allowed
to pay an employee a salary as opposed to an hourly rate.
The following paragraphs discuss the rules regarding employers' duties
when employees receive a salary. Salary is not always available for all
employees.
The General Rules Regarding the Payment of
a Salary to Employees
When a salaried employee performs any work during the pay period, that
employee must be paid the full salary amount. This amount cannot be reduced
because of quality or quantity variations of the work performed. Alternatively,
when the employee does not perform any work during the pay period, there
is no requirement to compensate that employee for the pay period at all.
Generally, deductions are not permitted, except in a certain number of
enumerated instances.
Deductions Not Allowed from Salaried Workers
If deductions from a salaried employee are taken against the salary rules,
the employer faces losing the opportunity to pay that employee salary
and all other employees in that job classification. Therefore, it is of
utmost importance that an employer be careful not to violate the salary
rules.
| Deductions cannot be made for the following time: |
- When work is not available to the employee
- For partial day absences to attend a meeting with school officials
- When the employer is closed due to weather
- Days off for jury duty
- Illness when the employer does not provide wage replacement
benefits for such absences.
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| Isolated or inadvertent improper deductions will not result in the
loss of the salary exemption if the employer reimburses the employee
within a reasonable time after the error is discovered. To determine
if an employer will lose the opportunity to pay salary to an employee
or class of employees, the Department of Labor will look at the following
circumstances: |
- The number of improper deductions and total number of employees
involved
- When the improper deductions were made
- The location of the employees
- Whether the employer has a clearly communicated policy of when
and how deductions are applied.
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| Generally, the opportunity to pay a salary will not be lost if the
employer has a clearly communicated policy prohibiting improper deductions
and includes a complaint mechanism, reimburses the employee for any
improper deductions, and makes a good faith effort to comply. If the
employer does not make a good faith effort to follow the safe harbor
rules and willfully violates the policies, the safe harbor will not
be helpful to the employer. |
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Deductions Allowed from Salaried Workers
Even though the rules are strict regarding what is not allowed, the
government has issued new rules regarding what deductions and requirements
can be made without a penalty applying to the employer. They are as
follows: |
- Deductions from exempt employee's accrued leave accounts
- Requiring employees to work a specified schedule
- Requiring employees to track their hours
- Schedule changes
- Full days due to disciplinary suspensions
- Personal days for other than sickness or disability
- Days for sickness or disability if deductions are made under
a bona fide plan of providing wage replacement benefits
- To offset amounts received as payment for jury, witness and
military pay
- Penalties for violating safety rules of major significance
- Proportionate amounts in employee's first and last pay period
- Family and Medical Leave Act Days.
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Department of Labor Audits
Not much has changed in this area under the new labor standards. But
be aware, both state and federal agencies can audit employers' records
regarding their treatment of their employees. Audits typically happen
when disgruntled employees call the Department of Labor to report
a potentially illegal situation. The most typical situation is when
a salaried employee believes he or she should be receiving overtime.
The auditors can come announced or unannounced. At the conclusion
of an audit, the agency will assess fines if there are errors or omissions
that they feel were improper. If the discrepancies are unintentional,
the penalties tend to be less or nonexistent. If the discrepancies
are intentional, the penalties tend to be higher. |
Conclusion
The mere fact that an employer elects to pay an employee salary does not
automatically make salary payments legal. When an employer elects to pay
salary, the employer must know the rules and proceed with caution. During
the transition, employers can expect resistance from employees who were
previously eligible for overtime. The average employer can expect resistance
in the form of insubordination, lawsuits and resignations. Though the
new rules convey minimum standards, those standards do not necessarily
have to be followed in favor of an agreement that is more favorable for
an employee.
This is a confusing subject and employers are forewarned to obtain proper
advice from qualified professionals before structuring pay rates, job
descriptions and salary.
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