New federal regulations governing when employees are entitled to overtime pay took effect on August 23, 2004.

The new regulations, issued by the Department of Labor (DOL) on April 20, 2004, attempt to bring overtime laws into the 21st century. Employers no longer will need to consult 50-year old, outdated regulations to determine who is eligible for overtime pay. The old rules reference extinct jobs like straw bosses, gang leaders, legmen and key punch operators and fail to recognize many jobs that exist in today's modern society. The new regulations seek to remedy the failure of the old regulations to provide guidance to employers and employees on who is eligible for overtime pay. The regulations were issued under the Fair Labor Standards Act (FLSA), 29 USC §201 et seq., and are at 29 CFR Part 541.

In March 2003, DOL released proposed regulations for public comment. Although the comment period lasted only 90 days, DOL received an overwhelming response -- more than 75,000 comments. Labor unions severely criticized the proposed revisions, arguing that they would deny overtime pay to many employees who were then eligible. The new regulations are, in part, a response to that criticism.

I.	Major Changes Under the New Regulations

Under FLSA, unless exempt, employees must receive at least the federal minimum wage for all hours worked and overtime pay at 1½ times the regular rate of pay for all hours worked over 40 in a workweek.

One of the most significant changes is the mandate that employers pay overtime to employees earning less than $455 a week or $23,660 annually. Under the prior law, employers had to pay overtime to employees earning less than $155 per week or $8,060 annually.

The new regulations also replace the prior regulations' use of so-called "long" and "short" duties tests with new "standard" tests to ascertain if employees who earn between $23,660 and $100,000 annually are exempt from overtime payment requirements.

The new regulations also create a new exemption from overtime payment requirements for certain "highly paid" employees who earn at least $100,000 a year. The new regulations also guarantee non-exempt status to employees in many "blue collar" occupations, removing any doubt about their eligibility for overtime pay.

II.	White Collar Exemptions

The new regulations continue to provide an exemption from overtime payment requirements for bona fide executive, professional and administrative employees; outside salespersons; and certain computer professionals. However, many of the tests for exemptions have changed. The new tests are set out below, with a comparison to the prior regulations.

A.

Executive Exemption Standard Test

Under the new regulations, the executive employee exemption applies if:

1.

The employee is compensated on a salary basis of at least $455 per week;

2.

The employee's primary duty is to manage the enterprise or a customarily recognized department or subdivision of the enterprise;

3.

The employee customarily and regularly directs the work of at least two or more other full-time employees or their equivalent; and

4.

the employee has the authority to hire or fire other employees, or his suggestions and recommendations as to hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

The old regulations had set forth a short test, providing that an employee was an exempt executive employee if:

1.

The employee was compensated on a salary basis of at least $250 a week;

2.

The employee's primary duty consisted of the management of the enterprise in which he is employed or of a customarily recognized department or subdivision of it; and

3.

The employee customarily and regularly directed the work of two or more other employees.

(The old white collar exemption also contained long tests for determining the overtime status of employees earning at least $155 a week. The short test applied to employees earning at least $250 a week.)

B.

Administrative Exemption Standard Test

Under the new regulations, the administrative employee exemption applies if:

1.

The employee is compensated on a salary or fee basis of at least $455 a week;

2.

The employee's primary duty consists of performing office or non- manual work directly related to the management or general business operations of the employer or the employer's customers; and

3.

The employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The old regulations contained a short test exempting an administrative employee if:

1.

The employee was compensated on a salary basis of at least $250 a week;

2.

The employee's primary duty consisted of performing office or non- manual work directly related to management policies or general business operations of the employer or the employer's customers; and

3.

The employee's duties included work requiring the exercise of discretion and independent judgment.

C.

Professional Exemption Standard Test

Under the new regulations, the learned professional employee exemption applies if:

1.

The employee is paid on a salary or fee basis of at least $455 a week;

2.

The employee's primary duty consists of performing work requiring advanced knowledge defined as work that is predominantly intellectual in character and that includes work requiring the consistent exercise of discretion and judgment;

3.

The advanced knowledge is in a field of science or learning; and

4.

Such advanced knowledge is customarily acquired by a prolonged course of specialized intellectual instruction.

Under the new regulations, to qualify for the creative professional employee exemption:

1.

The employee must be compensated on a salary or fee basis of at least $455 a week; and

2.

The employee's primary duty must consist of performing work requiring invention, imagination or talent in a recognized field of artistic endeavor.

The old regulations included a short test providing that an employee was exempt as a professional employee if:

1.

The employee was compensated on a salary basis of at least $250 a week;

2.

The employee's primary duty consisted of performing work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study; and

3.

Either (a) the work required the consistent exercise of discretion and judgment, or (b) the employee's primary duty consisted of performing work requiring invention, imagination or talent in a recognized field of artistic endeavor.

D.

Computer Employee Exemption

Under the new regulations, the computer employee exemption generally applies if:

1.

The employee is compensated on a salary basis of at least $455 a week or at a pay rate of at least $27.63 an hour;

2.

The employee is employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field; and

3.

The employee's primary duty consists of either (a) the application of systems analysis techniques and procedures; (b) the design, development, documentation, analysis, creation, testing or modification of computer systems or programs; (c) the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (d) a combination of the duties and skills set forth in (a) through (c).

Prior FLSA regulations contained a similar exemption for computer professionals.

E.

Outside Salespersons Exemption

The new regulations also continue to provide an exemption from overtime for outside salespersons. This exemption applies to:

1.

An employee whose primary duty is making sales, or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and

2.

Where the employee is customarily and regularly engaged away from the employer's place or places of business.

Besides the above requirements, the old regulations contained a confusing limitation on the amount of time an outside salesperson could spend performing non-exempt work. (Salespersons could perform non-exempt work during no more that 20 percent of the hours worked in the workweek by non-exempt employees of the employer.)

III.	Highly Compensated Employee Exemption

The new regulations include an added overtime exemption for "highly compensated employees" -- defined as employees who receive total annual compensation of $100,000 or more. These highly compensated employees are exempt only if they customarily and regularly perform at least one of the duties of an exempt executive, administrative employee or professional employee.

IV.	Blue Collar Workers

The new regulations reiterate that the exemptions from overtime only apply to white collar and not to manual laborers or other blue collar workers who perform work involving repetitive operations with their hands, physical skill and energy. Some of the FLSA-covered, non-management employees identified as blue collar in the new regulations - and, therefore, unquestionably guaranteed overtime pay status -- are: carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers. These employees are not exempt from overtime pay requirements even if they are highly paid.

V.	First Responders

The exemptions from overtime under the new regulations generally do not apply to "First Responders."

First Responders include police officers, firefighters, paramedics, emergency medical personnel, rescue workers, hazardous materials workers and similar employees. These employees will not become exempt from overtime pay regardless of their pay level.

VI.	Congressional Attempts to Limit Effect of New Regulations

On May 4, 2004, the Senate voted to approve an amendment that Sen. Tom Harkin (D-Iowa) proposed to prevent portions of the new regulations from taking effect. In particular, Sen. Harkin's amendment would have prohibited giving effect to any portion of the new regulations that would cause a worker who was then eligible for overtime to lose eligibility. The vote followed unanimous approval of an amendment by Sen. Judd Gregg (R-New Hampshire) that would have preserved the overtime status for more than 50 occupations that Democrats claimed were at risk of losing overtime status, including computer programmers, nursery school teachers, chefs, journalists and plumbers.

On May 12, 2004, the House of Representatives blocked an effort by Rep. George Miller (D-California), who sought a vote to require the new regulations to retain eligibility for all workers then eligible for overtime.

Despite the ongoing controversy, the new regulations went into effect -- without alterations -- on August 23.

But, on September 9, 2004, the House voted 223 to 193 to bar DOL from enforcing the new regulations. The House provision, contained in an appropriations bill, would retain new protections in the regulations for workers earning less than $23,660 year. The White House has threatened to veto the appropriations bill. And, the Republican House leadership expressed confidence that it could remove the bar on enforcing the new rules during conference committee negotiations with the Senate.

VII.	Employers Must Prepare for the New Regulations

According to DOL, its "FairPay" initiative -- the term DOL has used to describe the new regulations -- will strengthen overtime rights for 6.7 million American workers. DOL estimates the new regulations will make more than 1.3 million salaried workers eligible for overtime. DOL further estimates that employers will pay more than $375 million a year in additional wages as a result of the new regulations and that it will cost employers $700 million in start-up costs alone to ensure that they comply with the new regulations.

DOL has indicated that it will vigorously enforce the new regulations against employers and seek compliance, including repayment to employees of lost wages, with penalties, when violations are found.

Therefore, employers should immediately evaluate their operations to determine whether current compensation practices comply with the new regulations and applicable state wage and hour laws.

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For more information about the issues covered in this report, please contact Linda S. Husar in our Los Angeles office at 213-576-8017 or at lshusar@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2004 Thelen Reid Brown Raysman & Steiner LLP