On August 23, 2004, the Department of Labor’s revisions to the regulations defining which employees are exempt from overtime pay under the FLSA went into effect.1 The most significant changes include an increase in the amount of minimum weekly salary that an employee must receive to be classified as exempt to $455 per week, a revision that makes it more difficult to classify employees as exempt. Another significant change is the elimination of the old "long" test that capped the amount of time exempt employees paid below a certain threshold could spend in non-exempt work in any workweek at 20%. Thus, under the new regulations, any employee who meets the higher salary minimum will be considered exempt if at least 50% of the person’s time involves the performance of exempt work. The revised FLSA regulations also authorize employers to make deductions from an exempt employee’s salary for full-day disciplinary suspensions of less than a week — which was previously prohibited — and include a new provision that protects employers who have adopted a safe-harbor policy regarding improper pay deductions from losing the overtime exemptions.
Uncertainty Regarding Status of Changes To Federal Regulations
The changes to the FLSA’s overtime regulations continue to come under intense political attack in response to the concern of labor interests that the revisions will result in the loss of overtime for a significant number of workers. Indeed, as recently as September 9, 2004, the U.S. House of Representatives voted to overturn the revisions — a measure that would likely be vetoed by the current administration if it passed the Senate but has the strong support of Democrats, including John Kerry, who has been a vocal opponent of the changes. As the revisions are currently the law, however, employers must ensure compliance despite any uncertainty about future changes. Further, in the event that any such changes occur, it is likely they will be limited to eliminating those provisions that could cause employees to lose overtime and will not repeal those updates beneficial to employees.
Impact of FLSA Changes on Wisconsin Employers
in Light of State Overtime Requirements
In addition to ensuring compliance with the changes in federal law, Wisconsin employers must also pay particular attention to state overtime pay requirements. Shortly before the new federal regulations went into effect, Governor Doyle and the Wisconsin Department of Workforce Development ("DWD") issued a long-anticipated announcement regarding the impact of the federal changes on Wisconsin’s overtime law. Unfortunately, the news for Wisconsin employers is that the state’s overtime regulations will not incorporate the changes made to the federal regulations. As a result, employers must analyze exempt status issues under both federal and state laws and must meet the requirements of whichever law provides the greatest overtime protection to employees. As demonstrated by guidance issued by the DWD, which is available at http://www.dwd.state.wi.us/er/labor_standards_bureau/ot_doc_for_website.htm, this means employers must pay employees they wish to classify as exempt the greater federal salary requirement of at least $23,660 per year while also ensuring that such employees meet the more stringent duties requirements under state law. With regard to the latter, employers must ensure that any employee treated as exempt does not spend more than 20% of his or her time performing non-exempt work — a significant contrast to the much lower 50% threshold under federal law. It is also noteworthy that the DWD takes the position that to qualify for the "computer" exemption, the employee must be paid at the hourly rate of $27.63 or an equivalent annual salary of approximately $56,000, not the lower salary rate applicable to other exempt classifications — $455 per week — as is expressly permitted by the revised federal regulations. This position is somewhat inconsistent with a misleading suggestion in the DWD’s guidance.
While not discussed in the guidance, the DWD has also stated that Wisconsin’s regulation regarding the requirement of payment on a salary basis does not incorporate the changes to the analogous federal regulations. Wisconsin employers therefore cannot take advantage of the beneficial changes in the revised FLSA regulations regarding permissible and impermissible deductions discussed above. Specifically, Wisconsin employers cannot make deductions from exempt employees’ salaries for disciplinary suspensions of less than one week and cannot seek the protection of the new federal safe harbor provision — although adopting the type of safe harbor policy described in the new federal regulations to diminish the risk of improper deductions is nevertheless advisable and recommended for Wisconsin employers with employees located in other states.
Lessons for Employers
Just as Wisconsin employers must analyze family leave and disability issues addressed by a corresponding federal law under a distinct and complex set of state laws and regulations, the same is true with regard to wage and hour issues. To complete the process of auditing compensation practices and exempt status determinations that many employers undertook in response to the recent changes to the federal regulations, such practices and determinations must also be subjected to analysis for compliance with what are now Wisconsin’s significantly divergent overtime rules.
For additional information regarding wage and hour law compliance, including for assistance with auditing your compensation practices and exempt position classifications, please contact Sean M. Scullen 414.277.5421 / ss8@quarles.com, or your Quarles & Brady attorney.
1 The revisions are described in detail in the April 2004 Quarles & Brady LLP Employment Relations E-Mail Alert, Issue #16 entitled, "FLSA Regulations Finalized; Next Step: Compliance," which is available online at www.quarles.com.