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With New Overtime Rules Looming, CCH Helps Employers Gear Up For the Change

(RIVERWOODS, ILL, March 30, 2004) – The U.S. Department of Labor (DOL) is ready to issue final regulations that will change the rules used to define which employees are exempt from the overtime-pay requirements of the Fair Labor Standards Act (FLSA), the federal wage-hour law. Noting that the new rules will likely pose an implementation challenge for employers, CCH INCORPORATED, a leading provider of human resources and employment law information, offers tips to help employers gear up for the change.

"It’s critically important for employers to be aware of the new rules and how they apply to their business and employees," said Ronald Miller, J.D., CCH senior labor law analyst. "Many employers today are challenged by the exempt vs. non-exempt issue, and the new rules may inject further confusion into the arena. According to the Department of Labor, many more employees will be eligible for overtime under the new rules, so it’s crucial for employers to ensure compliance."

Overview of Pending Rule Changes

The proposed revisions to the Labor Department’s "white-collar" exemption rules will increase the current salary floor under which employees must be paid time-and-a-half for the hours they work over 40 hours in a given work week. Currently, only those white-collar employees who earn less than $8,060 per year automatically are entitled to overtime pay, a salary that translates to an hourly pay rate lower than the federal minimum wage. As proposed, the rules would grant overtime pay protection to all white-collar workers who earn less than $22,100 per year. This figure likely will be adjusted upward in the final version of the rules, the DOL has indicated, because the agency initially based its analysis on 2001 salary data.

The proposed rules also change the "duties tests" that are used to classify employees as exempt administrative, executive, or professional employees. These provisions are the source of most frustration and litigation around the FLSA. While the DOL says the new rules are intended to eliminate much of this confusion, many believe the currently proposed rules are no clearer. However, the revised classification tests are certain to increase the number of higher-paid white-collar employees who are classified as exempt.

Tips to Help Employers Comply

As the rule changes draw near, employers should consider how the changes will affect their organization and think about the changes they will need to make to support the new rules. To assist employers in preparing for the changes, CCH provides employers with the following tips. CCH also will issue a special report on the white-collar rule changes once the Labor Department’s final rules are issued.

1. Identify employees who earn less than $25,000. Some employees will be newly nonexempt under the revised salary floor. The proposed rules set the salary floor at $22,100, but that amount is likely to be adjusted upward. Pending the release of the final rules, it's useful to flag those workers at the $25,000 and under level. Then evaluate whether your payroll costs will be best controlled by simply raising their salaries to retain their exempt status (provided they still meet the duties test), or carefully budgeting your overtime needs.
2. Conduct job analyses. Employers need to conduct comprehensive job analyses to determine which employees perform administrative, professional, and executive duties—as defined by the new white-collar rules. Don’t forget to carefully identify the on-the-job training or education required to perform the job. The new rules promise to expand the definition of "learned professionals," and exempt status might hinge on these criteria.
3. Revise job descriptions. Following comprehensive job analyses, revise position descriptions accordingly. Make sure the descriptions truly reflect the work performed and skills required. Seek input from employees, and make sure their managers sign off and confirm that the duties and qualifications identified are accurate.
4. Work closely with payroll. Make sure your HRIS system is updated to reflect accurately employees' revised exempt/nonexempt classifications, and that overtime is paid accordingly.
5. Revise your discipline policy. Employers now have the option of docking exempt workers a full day's pay for certain serious disciplinary infractions without jeopardizing their exempt status. If you choose to implement this option, ensure your disciplinary policies reflect the change. But first evaluate whether this now lawful option is consistent with your organization's performance management philosophy.
6. Develop a communications strategy. You have some fairly sensitive news to convey to your employees. How well you craft the message will be critical in preventing morale problems and other negative fallout. Collaborate with your corporate communications team within the organization; their expertise will be essential.
7. Honor union contracts. Even though some of your employees will be newly exempt from overtime, your organization still must comply with the terms of any bargaining agreement in place. If your union contract provides for overtime pay for bargaining unit members, failure to compensate for overtime hours would be a breach, regardless of what the rules say about the employees’ exempt status. (When the contract comes up for renewal, though, you’ll be in a much stronger bargaining position when negotiating this issue.)
8. Avoid overtime overkill. Your organization may now be able to require additional hours from certain employees without having to compensate the extra time. But there are other strong business reasons not to impose excessive overtime demands upon your workforce. Burnout, poor morale and turnover are potential dangers to avoid. Draft your overtime policy accordingly, and make sure line managers are on board.
9. Don’t forget the status issue. After conducting your job analyses, you may find that you'll need to reclassify employees as "nonexempt" under the new rules. In theory, these employees should be delighted by the prospect of now being eligible to earn overtime pay. But they may instead feel they're being demoted and losing status within the company. You'll need to work with your managers in a concerted effort to convey that, exemption status aside, these employees remain as valuable and integral to your organization as they have always been.
10. Don't drop your guard. While employers may want to believe the rule revisions will ring in a new era of reduced wage-hour litigation, that may not be the case. The newly defined exemption categories will still cause confusion; what's more, there won't be extensive case precedent to fall back on for guidance. Remember also that regardless of how correctly you classify employees under the new rules, employees still have two years to sue (three years if violations were willful) if they were misclassified under the old rules.

CCH labor law analyst Lisa Milam-Perez also notes that employers shouldn’t lose sight of their overall compensation strategy.

"Keep in mind that nothing prevents you from compensating exempt employees for overtime hours worked," Milam-Perez said. "When reclassifying employees as exempt, evaluate the impact that lost overtime pay would have on their overall compensation package. Employers may want to consider if they will need to continue paying overtime to retain employees in certain competitive jobs, or if they should restructure their bonus plans to alleviate the impact in a more cost-effective way."

For additional information on the new regulations, visit cch.com/overtime, which will include an employment law briefing by CCH law analysts on the new regulations when they are issued.

About CCH INCORPORATED

CCH INCORPORATED is a leading provider of employment law and human resources information for attorneys and human resources professionals. The CCH Human Resources web site is hr.cch.com. Headquartered in Riverwoods, Ill., CCH was founded in 1913 and has served more than four generations of business professionals and their clients. CCH is a Wolters Kluwer company. CCH and Aspen Publishers comprise the Wolters Kluwer Legal unit.

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