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Are You Prepared For New Overtime Rules Effective In August

New overtime rules announced by the United States Department of Labor may well alter what you pay as an employer or what you earn as an employee. The new rules are the first major update to those enacted over fifty years ago when Congress created the 40-hour work week by guaranteeing overtime pay for millions of workers for each additional hour on the job. Assuming that Congress does not block their implementation, the new rules will go into effect in mid-August 2004.

Under the rules set to be retired, only those white-collar employees who earned less than $8,060 per year were automatically entitled to overtime pay. Certain executive, professional and administrative employees (the so-called "white-collar" exemptions) were not eligible for overtime. Generally, these were employees who (1) met defined criteria relating to their duties and (2) were paid a guaranteed minimum salary without regard to the quality or quantity of their work.

The new proposal preserves this two-part structure but makes significant changes to both requirements. The new rules will grant overtime pay protection to all white-collar workers who earn less than $23,660 per year. For those making between $23,660 and $100,000 per year, overtime pay might still be available depending on whether the employees "fit" the criteria that define the new exemptions. Those making more than $100,000 per year will likely not be eligible for overtime, even if they do not fall within the revised "white-collar" exemptions.

Conventional wisdom suggests that fewer "white-collar" employees will be eligible for overtime pay under the new rules than had been eligible under the old rules. Under the new rules, revised criteria help define who, among those making between $23,660 and $100,000 per year, is not entitled to overtime pay:

"Executive" Employees:

  • The employee's primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
  • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
  • The employee must have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
"Administrative" Employees:

  • The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
  • The employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
"Professional" Employees:

  • The employee's primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
  • The advanced knowledge must be in a field of science or learning; and
  • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
The new rules contain other criteria for additional exempt classifications, including "Computer Employees," "Creative Professionals," and "Outside Sales Employees." The Department of Labor has set forth a very helpful summary of these additional exemptions, and other facets of the new rules, athttp://www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm.

Why should you care about these new rule? Obviously, as an employee, you will want to know whether your total compensation will increase or decrease. For employers, failure to adhere to overtime rules can result in costly and time-consuming litigation. Such litigation has been increasingly common, and the prospect of these major revisions poses an even greater risk for employers.

As employers, what can you do to reduce the risk of such litigation under the new regime? Identify white-collar workers who make less than $23,660 per year. Provided such employees meet one of the new exemptions, consider whether the additional payroll costs justify raising their salaries above the $23,660 floor. Review each employee's job duties and honestly assess whether he or she falls under any of the new exemptions. If you use written job descriptions, revise them to accurately reflect the duties being performed. Update your payroll system to make sure that, where required, your employees actually receive the overtime to which they may soon be entitled. Seek the advice of a competent professional for assistance. The new rules contain additional details and aspects that are beyond the scope of this column. Those specific rules may well apply to your business. Finally, if you think the new rules have gone too far, or not far enough, call or write your legislators. Considering this year's Presidential campaign, it's entirely possible that congressional action may substantially change these rules, or even halt their implementation.

by Thomas C. Pavlik, Jr.
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