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New Overtime Rules Keep Employers In The Dark

Tom Harkin went on a rampage last year, spending most of the summer using his legislative muscle trying to derail the August 2004 implementation of the Fair Labor Standards Act's (FLSA) new regulations. It wasn't a surprise to the Republicans. The Democratic senator from Iowa is known for his liberal views, and openly takes pride in going to bat for America's working people.

That's why Harkin was so mad. He claimed the new regulations were "a shameful attack on the 40-hour work week, purposely designed to strip millions of workers of their right to overtime pay." Employees across the country feared their overtime protection was about to disappear.

But while companies struggled to put out those fires by assuring employees that almost nothing would change, they found themselves facing an even bigger problem: understanding the new rules.

The previous regulations also were riddled with ambiguities. Companies had hoped the Department of Labor (DOL) would clear up the confusion while drafting the changes. But not only did the DOL fail to do that with the new regs, it also created a host of new problems.

Now, months after the new regulations have taken affect, GCs and HR professionals still are sorting through the changes, trying to ensure their clients are in compliance. The two biggest concerns: the new highly compensated exemption and the administrative exemption--the latter of which has had employment experts scratching their heads since Congress drafted the overtime protection rules as an amendment to the FLSA in 1950.

"While the DOL and the Bush administration had the opportunity to answer all the open questions with these changes, all they really did was clean up the language in an attempt to modernize the rules as extensively as possible," says Stan Weiner, partner at Jones Day in Dallas. "They basically punted on anything significant."

Weiner says they didn't have to.

Exemption Nightmare

In March 2003 the Bush administration proposed its original set of changes to the FLSA regulations. Before September 11 the administration originally wanted to approve those regulations, which outlined fairly sizable revisions to the administrative exemptions.

"But the administration obviously got sidetracked with other things, and it never happened," Weiner says. "Those changes would have provided substantial clarity in the administrative-exemption area."

According to Weiner, the administrative exemption is the most confusing of the FLSA rules.

To qualify for the administrative exemption, an employee must perform office or nonmanual work directly related to the management of general business operations of the employer or the employer's customers, and exercise discretion and independent judgment with respect to "matters of significance."

"'Matters of significance' is something that has always been problematic," says Patrick Madden, a partner at Preston Gates & Ellis in Seattle. "What that means for one company may mean something else for another, and there is no clear understanding of how a company should apply it."

Daniel Brennan came face to face with this ambiguity when--as the sole in-house lawyer for Identify Software Inc., a North Carolina-based software company--he was charged with ensuring his company complied with the new regulations.

"We had a few administrative people we really had to look at closely," Brennan says. "My first thought was that we were going to have to reclassify a lot of employees from exempt to nonexempt. And I was going to have to assess what the increased cost of having to pay overtime would be."

But after spending two months dissecting the rules and thousands of dollars hiring outside counsel and HR consultants to help make sense of the administrative exemption, Brennan discovered very little would change.

"In the end we were OK," he says. "But it was a concern for awhile. That's typical with governmental regulations, though. They are never straightforward and clear."

The DOL created another area of ambiguity when it added the highly compensated employee exemption.

Under this new regulation, "highly compensated" employees wouldn't receive overtime protection if they earned a total annual compensation of $100,000 or more; their primary duties include performing office or nonmanual work; and they regularly perform at least one of the exempt duties of an exempt executive, administrative or professional employee.

Labor and employment experts believe there are several problems with the new rule. First, it needs to be more straightforward, rather than requiring employers to compare an employee's duties with other exempt employees.

"They should have a highly compensated carve out, period. If you make X amount of dollars, you qualify," Madden says. "How it's currently written is incredibly confusing, and the courts will end up deciding what in fact was meant by the new rule."

Additionally, the highly compensated exemption doesn't provide an index for inflation. "Over the years, it will effectively be eroded," says Adam Klein, partner at Outten & Golden, a New York-based firm that represents employees. "As history has shown, it takes years for these issues to be looked at again. And when you have a period of steady inflation, all of a sudden $100,000 may be equivalent to what $50,000 is in today's standards. But there is no way to account for that."

While there is little companies can do about that, there are ways they can resolve the other problems.

Finding Answers

First, companies should review the classification of employees and address potential mistakes they see now before they are faced with a lawsuit or DOL audit.

"Most in-house lawyers aren't labor and employment experts," explains Penny Ann Lieberman, partner at Jackson Lewis in White Plains, N.Y. "And human resources folks usually aren't lawyers. Hiring consultants or outside counsel can go a long way to avoiding lawsuits. It's a lot harder to fix problems when you're in the middle of a DOL audit or litigation."

Another option is to obtain a wage and hour opinion letter from the DOL. A company confused about the exemption status of an employee, whether that person is administrative or highly compensated, can send an anonymous letter to the DOL posing the description of the position. A wage and hour administrator at the DOL will write an opinion on whether or not the employer should classify that person as exempt.

And if all else fails, then don't do a thing.

"I advise employers to revert back to what they were doing under the old regulations if they are really confused," Weiner says. "The rules changed, but not that much."

Another option is to hold out for clarification on the regulations, but the wait may be too long for some to bear. So far, there are no proposed amendments to the current regulations that will clear up the ambiguities.

That's assuming, of course, one enthusiastic Democrat doesn't get his way.

Power To The People

Under his most recent proposed legislation, the Overtime Rights Protection Act, Senator Harkin aims to roll back the "Bush administration's anti-worker and anti-family regulations" as well as restore the right to overtime pay to any worker who was eligible for overtime before the new regulations came into affect.

"This is not the time to stick working families with a pay cut, which is why Congress has voted six times to repeal Bush administration regulations that would deny up to 6 million workers their right to overtime," Harkin said in a January statement.

He believes that--with the exception of the salary adjustment, which went from $8,060 to $23,660--in every instance where the DOL has made significant changes, it has weakened overtime protection and opened the rules to increasing amounts of litigation.

Klein agrees that the FLSA may end up in court.

"The courts are going to have to construe these regulations and figure out what they mean," he says. "Right now it's hard to know what impact they will have or how the courts will respond."

Others believe the rules are OK as written.

Lawyers representing employers, however, scoff at Harkin's effort, claiming it's nothing more than the work of an overzealous liberal.

"It's all much ado about nothing," Weiner says. "The more time that elapses from the regulations' effective date and the more people see they didn't have the draconian affect on employees Senator Harkin claimed they would have, the more wind is taken out of his sails."

Furthermore, Weiner doesn't foresee changes happening anytime soon.

"The DOL blew their wad on this one," he says. "It has been 50 years since anything has been done. And when the changes were finally made, it was done with great pain. I don't think anyone is going to do much about it at this point."

But Harkin isn't giving up.

"I will do everything in my power to ensure that the overtime rights of American workers are protected," he said in his statement. "This attack can and must be stopped."

Staff Writer

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