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Proposed Overtime Changes: Bad News for Workers

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The Bush Administration is acting to make it easier for businesses to work employees longer hours without paying overtime compensation. While the proposed changes are being marketed as employee-friendly efforts to increase “flexibility” and benefit low-income workers, the reality is far different. Instead of trying to further weaken the rules, we should be strengthening what we already have. Comments on the proposed regulations are due on June 30, 2003, so the time to speak out is now.

The overtime rules under the Fair Labor Standards Act (FLSA) established the 40-hour workweek in 1938. By making every hour worked beyond 40 in a week 50% more expensive for the boss, the law discourages employers from assigning longer hours and rewards employees for the sacrifice of their personal or family time. Other than union contracts, the FLSA is the most important brake on longer work hours. The overtime law also helps limit the number of unemployed workers, by making it most cost-effective for employers to spread work around to more employees, rather than to employ a smaller number of overworked employees.

Few dispute that some change is definitely needed: for example, the salaries at which employees become exempt from the law’s protections were set in 1975. Federal law currently allows employees who make as little as $13,000 a year to be considered “highly paid executives” and denied overtime protection. They can be required to work 50, 60, or 70 hours a week with no pay beyond their set salaries. Businesses ranging from fast-food restaurants to insurance companies have exploited this unfair and ridiculous loophole in the law. Partly as a result of such loopholes, the average American — and especially the average woman — is working longer hours while wages fail to keep pace.

Instead of protecting more workers and improving enforcement of overtime laws, however, the proposal minimizes the number of people eligible for overtime protection, through changes proposed by the Department of Labor to the regulations interpreting the FLSA, and through its support of the Family Time Flexibility Act (HR 1119). The changes work in tandem, first to drastically narrow the number of employees who are eligible for overtime, and then to deny overtime pay to the few employees who remain eligible, by substituting comp time on the employer’s terms. By expanding the definitions of exempt “professional, administrative, and executive” employees, and by allowing employers to substitute comp time for overtime pay, the proposals will cut the cost to employers of longer work hours and seriously erode the 40-hour workweek.

Here are some of the proposed changes most likely to affect workers:

Salary Test

Serious problems arise from the fact that the salaries at which employees become exempt from the law’s protections were set in 1975. Federal law currently allows employees who make as little as $13,000 a year to be considered “highly paid executives” and denied overtime protection. They can be required to work 50, 60, or 70 hours a week with no pay beyond their set salaries. Businesses ranging from fast-food restaurants to insurance companies have exploited this unfair and ridiculous loophole in the law. Employees’ salary levels are a good indicator of whether or not they should be exempt from the overtime requirements of the FLSA. Employees who receive higher pay typically have more discretion, independent judgment in their jobs, and certainly have more economic power to bargain for better pay or working conditions.

Minimum salary threshold: While the increase in the minimum salary level above which an employee is presumed to be exempt may appear to benefit many low-income workers, the reality is far different. The Department of Labor’s estimate that as many as 1.3 million low-wage workers could benefit is simply not supportable. The proposed regulations raise the 1975 minimum salary level from $250 per week to $425 per week. Eighty percent of the workforce already makes $425 a week or more. Few of the remaining 20% of workers earning less than $425 per week qualify as legally exempt under the existing regulations, so the salary test revision does little, if anything, to help those workers. Also, as those who drafted the proposed regulations themselves acknowledge, there has already been more than a threefold increase in the consumer price index since 1975. Adjusted for inflation, the 1975 minimum threshold of $250 today equals $774 per week. This is almost twice as high as the minimum salary for exemption now proposed.

Maximum salary threshold: While it might not seem troubling at first that the new proposals make exempt from overtime any white collar worker making $65,000 or more annually regardless of duties, keep in mind that it has taken the Department of Labor 28 years to consider seriously raising the salary basis from $250 to $425 per week. If inflation continues as it has since the last time the minimum salary was set, it won’t be too long before $65,000 is worth only $22,000 of today’s dollars, which is $425 per week. As discussed in the preceding paragraph, 80 percent of the workforce today earns at least $425 per week. A very real possibility therefore exists that, when our grandchildren enter the workforce, only the bottom 20 percent will have even an arguable right to the 40-hour week. Both the minimum and maximum salary thresholds should have built-in adjustments for inflation, if they are to remain meaningful in future years.

The Executive, Administrative, and Professional Exceptions

Each of these three exceptions currently exist in the FLSA and regulations as an attempt to quantify the types of higher-level jobs that are intended to be exempt under the FLSA. Each individual’s employment situation is different, however, and technology affecting the workplace has evolved considerably since the FLSA was passed in the 1930s. Here are some of the proposed changes that will dramatically increase the pool of exempt employees not entitled to overtime pay:

Executive Exception: In an attempt to “simplify” the regulations, the Department of Labor has proposed to change the definition of “primary duty” used to determine whether the nature of the work performed by executive employees makes them exempt from overtime. The proposal would eliminate the important, current regulation that in order to be exempt, an employee performs non-exempt duties no more than 20% of the time. The proposed elimination of this guideline broadens the exemption to include workers who spend the majority of their time performing non-exempt duties. This would permit employers to manipulate job titles and evade overtime premium pay to low-level employees. Rather than simplify the regulations, the multi-factor “primary duty” test in the proposal will only increase the number of lawsuits concerning white collar exemptions.

The proposed regulations also consider changing the current requirement for the executive exemption that the employee supervise two or more employees. The proposal invites comments on whether that definition should be modified to include ‘the customary or regular leadership, alone or in combination with others, of two or more other employees’.” If this new, expanded definition of the executive exemption were to be adopted, employers could consider as few as two employees who are non-exempt (eligible for overtime) to be under the “leadership” of every other employee, which would make all the other employees meet the “executive” definition and thus make them ineligible for overtime. This is clearly not the appropriate standard for the executive exemption.

Administrative Exception: The proposed regulations would also modify the administrative exemption to replace the concept of “discretion and independent judgment” with a new requirement that the employee “hold a position of responsibility.” Contrary to the rule that a job title alone does not make a worker exempt, this rule proposes that the fact that an employee holds a “position of responsibility” is sufficient to meet the exemption. The proposed standard can be met merely by showing that the position requires a “high level of skill or training,” a term which is so loosely defined that practically any employee could qualify.

The proposal would eliminate the important, current regulation that in order to be exempt, an employee performs non-exempt duties no more than 20% of the time (40% for retail establishments). This change would broaden the exemption to include workers who spend the majority of their time on non-exempt duties, permitting employers to manipulate job titles and evade overtime premium pay to low-level employees.

Professional Exception: The proposal expands beyond the current standard that limits this exception to jobs requiring “advanced knowledge in a field of science or learning customarily acquired by a prolonged of specialized intellectual instruction,” for the first time allowing the advanced knowledge to also be acquired by work experience rather than education.

Other Proposed Changes Affecting Workers

Working Supervisors: The proposed rule’s descriptions of management duties for “working supervisors” and in retail establishments are too broad. The definitions would exempt from overtime fast food “managers” who spend the “majority of the time on non-exempt work.” This language makes it possible for fast food establishments to exempt nearly all line employees from receiving overtime pay. The “working supervisors” rule again emphasizes the job title of the employee, which violates the general principle that an employee’s job title is not sufficient to confer exempt status.

Sole Charge Executive: The proposed “sole charge executive” regulation would exempt from overtime anyone who receives a salary of $425 per week or more and is “in sole charge of an independent establishment or a physically separated branch establishment.” These employees will now be considered “bona fide executives,” regardless of whether their primary duty is management, they customarily and regularly direct the work of two or more employees, or have supervisor authority over any employees. This exemption is likely to result in one employee in each branch location to be considered to be a “bona fide executive” regardless of the individual’s performance of any management duties.

Many companies, such as retail car rental agencies, payday loan companies, ticket sales offices, and hot dog vendors, conduct business by opening very small branch offices which may only have one employee in the branch, whose primary duty is customer service. Under the proposed sole charge executive regulation, these individuals would likely be considered exempt from the overtime requirements without the company being required to establish that the individuals are truly “executives.”

No special exception to the general rules for executive employees is necessary for these individuals because if they are subject to the general rule for executive employees, they will be considered “bona fide executives” regardless of whether they are the sole person in charge of the branch. If these individuals do not meet this general rule, they do not have management as their primary duty and should not be considered exempt executives.

If the Department decides to include its proposed “sole charge executive” exemption in the proposed regulations, it must apply a minimum salary level to these individuals. Otherwise, companies will be allowed to place an individual in charge of a small branch establishment that has no other employees and pay that individual any pay rate (even a rate that is less than minimum wage) because this individual (as the de facto sole charge executive) will automatically be considered a “bona fide executive.”

Reductions in Pay for Partial-Day Absences: The current “no pay docking” rule, which prevents an employer from reducing an exempt employee’s pay for a partial-day absence, reflects the tradeoff that an employer must accept in exchange for the reality that exempt employees are paid to accomplish a job rather than by the hour, and that they often work far in excess of 40 hours per week. If an employer is permitted to dock an employee’s pay because an employee had to leave work early one afternoon, that employee is an hourly employee and not truly a salaried one.

The Department of Labor says permitting disciplinary deductions is a common sense change that will permit employers to hold exempt employees to the same standards of conduct as nonexempt hourly workers. 68 Fed. Reg. at 15572. Nothing in the current regulations prohibits employers from holding their exempt employees to the highest standards of conduct in their jobs. The regulations simply prohibit employers from docking exempt employees’ pay for disciplinary reasons.

The proposed regulations should also include a prohibition against reducing the employees’ benefits. If it is fundamentally unfair to dock an employees’ salary for working only part of a day, it is also fundamentally unfair to dock that employees’ vacation leave or other paid leave benefit.

Window of Correction: The proposed regulations allow for a “window of correction” which would give the employer a period of time in which to correct overtime violations before a lawsuit may be brought. However, the proposed regulations go too far, as they allow the employer to “correct” the problem at any time, even after litigation has been brought. An employer who deliberately makes deductions that it knows to be inconsistent with the salary basis test, and is then sued in an FLSA suit, could easily escape liability by merely correcting the problem.

No employer should be allowed access to the “window of correction” unless the employer meets a burden of establishing that any deductions made were “inadvertent,” that all deductions made were reimbursed as soon as they came to the employer’s attention, and that the employer has revised all of its rules, codes, policies, practices and procedures which leave no doubt that as a practical matter the affected employee will not be subject to such deductions in the future. As the proposed regulation stands, there is an extremely broad “safe harbor” provision, exceedingly difficult for employees to overcome, which, in practice, will only reward and encourage employers to knowingly break the law.

At the Workplace Fairness web site, we provide you with an opportunity to comment on some or all of these changes, and to have your comments delivered to the Department of Labor. If those most affected by the changes do not speak out, we have no hope of turning back some of the worst aspects of the proposals. As comments are due by June 30, 2003, it is critical that you act now, and forward this alert to colleagues, friends and family.

Comment on Proposed Changes to FLSA Overtime Regulations:

Speak Out Now to the Department of Labor

(note: some information for this blog entry was provided by the National Employment Lawyers Association, the National Employment Law Project and the Economic Policy Institute.)

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