Avoid Penalties    by Understanding the Rules

Review your overtime policies and exempt employee classifications now to ensure your business is in compliance with the new rules of the Fair Labor Standards Act. Last week, the Department of Labor announced who will qualify for overtime pay and who will be exempt. The rules, which were revised from earlier proposals, go into effect on August 23, 2004.

Check State Laws Too   In early April, Illinois moved to block the new federal overtime rules. The state adopted a law that allows employees who were eligible for overtime pay on March 30, 2004, to keep that eligibility.    This means that any federal changes in overtime rules that are less favorable to employees will not apply in Illinois.    So when considering the federal rules, you also must know if your state law is more favorable.

Still Exempt    The following employees are not affected by the changes and continue to be exempt from overtime:     Outside salespeople who regularly spend time away from the workplace.     Computer specialists (such as system analysts, system designers, computer programmers, software developers, and software engineers) who are paid on a salary basis of $455 a week or higher, or paid an hourly rate of at least $27.63.

Ignoring Rules Can be Costly    What’s the potential cost to an organization that violates the overtime rules? Plenty.    In 2003, the Department of Labor broughtactions on behalf of 314,660 employees, with costs to the employers for non-compliance reaching $182,119,413 – a 27.4 percent increase over 2002.    There is generally a two-year statute of limitations on unpaid overtime cases. And the amount owed is doubled, unless an employer shows it had a mechanism in place to track the hours worked. If a court finds the employer willfully violated the law, the statute of limitations is extended to three years, plus double damages. That can mean an employer has to pay six years worth of back overtime.    Here’s an example: Assume an employer is assessed with the equivalent of six years of back overtime pay to employees making an average base wage of $15 an hour. (The overtime amount is $22.50 an hour.) Assume the employees worked an average of 10 hours of weekly overtime for 50 weeks a year. That’s 500 hours a year of overtime pay at $22.50 an hour — or $11,250 a year. A six-year “hit” adds up to $67,500.    If 100 employees are involved in a legal action, the total liability to the employer is $6,750,000. This doesn't include legal fees for the employer and the employees.

Here is a summary of the changes:

 The pay level is increasing. For years, federal rules automatically qualified any employee making less than $155 a week for overtime pay, even if the employee worked in an exempt position. The new rule raises that threshold to $455 weekly ($23,660 annually).

For example, under the old rules, a retail chain could hire a store manager for $400 a week — $10 an hour for a 40-hour week. This store manager was exempt from overtime pay and could work more than 40 hours a week without additional pay. But under the new rules, this manager will be eligible for overtime pay because the weekly salary is under $455.

 A “highly compensated” rule is created. Under this exemption, almost all white-collar employees earning more than $100,000 a year are ineligible for overtime pay. The highly-compensated employee must primarily perform office or non-manual work and regularly undertake at least one of the duties of an exempt executive, administrative or professional employee.

 Some employees are automatically eligible for overtime. Regardless of rank or pay level, certain employees will receive overtime including police, firefighters, paramedics, emergency medical technicians, other types of “first responders,” and licensed practical nurses.

 The rule involving certain job types changes. There are new guidelines that exempt employees from overtime pay because of the type of work they do. They fall into three groups:

 Jobs with executive duties. There are three requirements. An employee must manage the enterprise, department or subdivision; direct the work of two or more employees; and have the authority to hire or fire employees.

 Jobs with administrative duties. The employee’s primary duty involves office or non-manual work directly related to the management or general business operations of the employer. Discretion and independent judgment must be exercised in significant matters.

  Jobs with professional duties. Under the test for a “learned professional” exemption, an employee must perform work that requires advanced knowledge and consistent discretion and judgment. The advanced knowledge must be in a field of science or learning and customarily be acquired through a prolonged course of specialized intellectual instruction.

Under the test for an exempt “creative professional,” an employee's job must involve invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The new rules provide some clarity for employers, who have grappled with complex overtime rules for years. However, the regulations are far from simple — they now span more than 500 pages. Employes who are not in compliance risk lawsuits and action from the Department of Labor. Consult with your human resources specialist or attorney for more information.

(Click here to read the Department of Labor's detailed explanation of what are now called the "FairPay" rules.)