On March 31, 2003, the Department of Labor proposed sweeping changes to the regulations that define which "white collar" workers are exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act. There is little dispute about the need to update the regulations, which have been in force with only minor modifications since 1949. However, the future of the DOL's proposal is far from clear, as labor and employee groups lobby to kill what they call an attempt to cut wages and abolish the 40-hour workweek, and businesses seek relief from Byzantine regulations and an explosion of overtime-related litigation.
Content of the Proposed Rules
Under the current overtime rules, workers generally must meet three tests in order to be exempt "white collar" employees. First, exempt employees must be paid at least a certain minimum amount each week - $ 155 for executives and administrative employees, and $ 170 per week for professionals. Second, they must be paid on a "salary basis," meaning that they receive a predetermined salary each week, free from deductions based upon variations in the quality or quantity of work performed, or the number of hours worked. Third, an exempt employee's primary job duties generally must be those of an "executive," "administrative" or "professional" employee.
Among the most significant changes included in the proposed regulations is an increase in the threshold salary for the exemptions. Under the current regulations, an employee who earns just $ 155 per week - $ 3.88 per hour for a 40-hour-per-week employee, or about $ 8,000 per year - could be classified as an exempt executive or administrator. The amendments proposed by the DOL would increase the salary floor for all three exemptions to $ 425 per week (about $ 22,100 per year).
The DOL proposal also alters the "salary basis" test. For instance, under the current rules, employers generally cannot dock the salary of an exempt employee for disciplinary reasons except in full-week increments. Also, if an employer does take improper deductions from the salary of just one or a few exempt employees, all employees in the same job category could be deemed non-exempt and entitled to overtime pay, unless the employer can establish that it corrected the error within a certain "window of corrections." Under the proposed rules, employers would be permitted to suspend employees in less than full-week increments for violations of established company rules. Further, the proposal clarifies the "window of corrections" defense for impermissible deductions, providing that deductions from the salaries of exempt employees will generally not result in reclassification of broad categories of employees, unless the deductions are the result of a "pattern and practice" of improper deductions.
The Department also proposes substantial changes to the "duties" requirements for executive, administrative and professional employees. For example:
- Currently, "executive" employees must have a primary duty of managing an enterprise or recognized department or subdivision thereof, and customarily and regularly direct the work of two or more other employees. The proposed rules would add to these a requirement that employees classified as executives "have the authority to hire or fire other employees or have particular weight given to suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees."
- Current rules require that administrative employees exercise "discretion and independent judgment." The proposed rules would replace this with a requirement that such employees occupy a "position of responsibility," meaning that the employee's duties are either of "substantial importance" to the employer, or that they require a "high level of skill or training."
- Under the current regulations, the primary duties of a professional employee must require "knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study . . . ." The revised rules preserve the requirement of "knowledge of an advanced type," but provide that such knowledge can be acquired by either formal academic instruction or "an equivalent combination of intellectual instruction and work experience."
- Under the new rules, office or non-manual workers who are guaranteed total annual compensation of at least $65,000 per year would be deemed exempt if they perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the proposed rules.
According to the DOL, approximately 1.3 million low-paid workers who currently are not guaranteed overtime pay under the FLSA will be eligible for overtime under the proposed rules, while about 644,000 workers who currently receive overtime pay could be reclassified as exempt under the proposed rules.
Formal Comments from Business and Labor
While most interested parties agree that the white collar exemption rules are due for revision, that may be the only point of general agreement. During the official 90-day public comment period, the DOL received approximately 80,000 formal written comments on its proposal.
In its formal comment, the U.S. Chamber of Commerce (the world's largest business organization, representing more than three million businesses and organizations) generally supports the proposal, noting that under the current regulations, "[w]hat should be a simple test, determining an employee's exempt status, is in fact a very complex one with little certainty." The Chamber says that this has made it difficult for well-intentioned employers to properly classify employees and caused "a dramatic increase in litigation, with FLSA claims now the most commonly litigated employment class-actions." However, the Chamber also comments that several of the provisions proposed by the Department do not go far enough to resolve uncertainties in the law, and suggests a "bright line" rule exempting all workers who earn more than a certain amount, regardless of duties.
Meanwhile, labor organizations including the AFL-CIO strongly oppose the rules, charging that they will erode the 40-hour workweek and could deny overtime pay to millions of workers, including police officers, firefighters, skilled health care workers, and others. In support of their contentions, labor groups point to a June 26 briefing paper issued by the Economic Policy Institute, a non-partisan think tank that stresses "concern for the living standards of working people." The paper, entitled "Eliminating the right to overtime pay: Department of Labor proposal means lower, pay, longer hours for millions of workers," charges that the DOL's figures grossly underestimate the number of employees who will lose FLSA protection under the new rules. According to the EPI, in just one-third of the occupations most directly affected by the white collar exemptions, over 8 million workers will likely lose protection under the Fair Labor Standards Act if the proposed rules become effective.
Proposal Draws Congressional Attention
While the DOL may not need Congressional approval to implement its proposed rules, Congress has the power to block the DOL proposal from becoming law, and some lawmakers are working to do just that. On July 10, 2002, Reps. George Miller (D. - Cal.) and David Obey (D. - Wis.) proposed an amendment to the House appropriations bill for the Education, Health and Human Services, and Labor Departments that would prohibit the DOL from spending any funds to implement regulations that would eliminate overtime protection for any worker who is not exempt under the current regulations. However, the amendment would have allowed the DOL to implement those parts of the rules that increase eligibility for overtime. The measure was narrowly defeated in the House by a vote of 213-210.
Despite the defeat in the House, Senate Democrats are also promoting legislation to block the DOL overtime rules. On July 29, Sen. Tom Harkin (D. - Iowa) and Sen. Edward Kennedy (D. - Mass.) introduced a freestanding bill entitled the "Overtime Compensation Protection Act." Like the proposed amendment to the Labor appropriations bill in the House, that bill would block the DOL from implementing any regulations that cause employees who would be eligible for overtime under the current rules to lose their protection.
Sen. Harkin has also announced plans for an amendment to the Senate appropriations bill covering the Labor Department similar to the amendment voted down by the House. While the Senate is not set to debate the appropriations bill until September, Sen. Harkin says that he has enough support - including that of some Republicans - to pass the amendment. However, even if it passes, the amendment would have to survive the House-Senate Conference Committee. Further, the Bush Administration has threatened to veto any appropriations bill including a measure to block the DOL rule. If his amendment fails to become law, Sen. Harkin says that Democrats will consider using the Congressional Review Act (which allows Congress to rescind administrative rules for a limited time after they become effective) to overturn the final rule when it is released.
The growing controversy over the DOL's proposed rules was highlighted in two recent Senate committee hearings. Democrats focused on the proposed rules during a July 29 hearing of the Health, Education, Labor, and Pension Committee on the confirmation of Howard Radzely as Solicitor of Labor, questioning whether the proposed rules would allow employers to require longer hours without pay, and whether the Secretary of Labor has the authority to pursue the proposed changes through regulation rather than legislation.
On July 31, the Senate Appropriations Committee heard testimony from Tammy McCutchen, the DOL Wage-Hour Administrator, as well as witnesses from the AFL-CIO, the U.S. Chamber of Commerce, and the Economic Policy Institute. Ms. McCutchen defended the proposed rules, stating that they merely clarify the current regulations, and that they will not affect workers who perform routine or manual work. Lawrence Lorber, a labor lawyer testifying on behalf of the U.S. Chamber of Commerce, also defended the DOL's proposal, arguing that the current regulations are badly outdated. Mr. Lorber noted that efforts to reform the white-collar exemption regulations had begun during the Clinton administration, and argued that the current white-collar exemption categories no longer fit the American economy.
Witnesses for the Economic Policy Institute and AFL-CIO criticized the DOL's estimates of how many workers will be affected by the proposed regulations. Ross Eisenbrey of the EPI stated that the DOL "does not estimate how many employees will lose overtime protection; rather it only estimates how many employees who are currently receiving overtime pay will lose it." This distinction is important, Eisenbrey stated, because "removing overtime protection will result in many employees working overtime who don't work overtime now." Christine Owens of the AFL-CIO added that the number of workers who currently earn overtime pay is only about one-seventh of the total number of workers currently eligible for overtime under the FLSA.
The debate over the new rules may also become an issue in the next presidential election. On August 4, Sen. John Kerry (D. - Mass), one of nine Democrats running for President, announced the launch of an Internet-based petition drive protesting the DOL's proposed rules. In his remarks, Sen. Kerry called the proposed rules "a sneak attack on workers' rights."
Uncertain Future
In the face of strong opposition, whether and in what form the DOL's proposed rules will become effective remains an open question. Before it can implement the rules, the DOL must review and evaluate the roughly 80,000 public comments submitted. That process will likely not be completed until sometime in 2004. In the meantime, Senate Democrats may have enough votes to pass legislation blocking the proposed rules, although it is not clear that such legislation could pass the House or survive a veto by President Bush. However, opponents of the rules may be able to pressure the DOL and the Bush Administration to scale back or modify the proposals.
Regardless of what happens to the proposed rules in Washington, it is likely that the current boom in overtime-related litigation will continue for the foreseeable future. Even if the rules are implemented in their current form, they will likely be challenged in court by those who contend that the Department of Labor lacks legal authority to implement them without Congressional approval. Further, it remains to be seen exactly how revised rules will be interpreted by the DOL and the courts. There will likely be an increase in litigation, at least in the short-term, as courts struggle to interpret and apply the new language in any such rules.
Conclusion
Because overtime-related litigation is not likely to decrease in the near future, employers should continue devoting time and attention to overtime and employee classification issues, both in order to comply with the current rules and to prepare for the new, if and when they are adopted. Further, although the formal notice and comment period on the proposed rules is over, the issues are far from settled. Businesses likely to be affected by the new rules should consider adding their voices to the debate over the rules to make sure that their interests are not neglected.
Additional information on the DOL's proposed rules is available on the Department's website at www.dol.gov/esa/whd. If you have additional questions or concerns, please contact Bill Pokorny, or any Wildman Harrold employment attorney, for further information.