Vol. 77, No. 8, August
Labor Department Issues Final Rules on Overtime Pay
With new federal overtime rules becoming effective Aug. 23, Wisconsin
employers - including law firms - will need to determine if their
employee classifications are accurate under the new rules and if the new
federal or current state rules provide greater overtime protection and
eligibility for their employees.
by Charlie Domer & Rochelle Klaskin
The U.S. Department of Labor (DOL) recently updated and revised the
white collar exemptions to the overtime rules of the Fair Labor
Standards Act (FLSA).1 The new regulations
become effective Aug. 23, 2004, and will affect virtually all Wisconsin
Charlie Domer, U.W.
2002, is a member of the firm's Labor & Employment Law practice
group, also located in the Madison office.
Chicago-Kent 1998, is an attorney at LaFollette Godfrey & Kahn, the
Madison office of Godfrey & Kahn S.C. She is a member of the firm's
Labor & Employment Law and Corporate practice groups.
The FLSA guarantees the payment of minimum wages and overtime pay to
most American workers. Employees who are covered by the FLSA, called
nonexempt employees, are entitled to premium pay of 1.5 times their
regular rate for all hours worked in excess of 40 hours in a workweek.
Some estimates suggest that overtime pay accounts for about 25 percent
of the total income of employees who work overtime.2 Certain types of employees, however, are
specifically exempted from overtime pay eligibility under the FLSA. The
most significant are the so-called white collar exemptions, which exempt
executive, administrative, professional, and outside sales employees
from the FLSA's overtime pay requirements.
While employers should regularly analyze which of their employees are
and are not eligible for overtime under the FLSA, the new rules provide
Wisconsin employers with a much-needed push to reevaluate their
workforces and determine whether their previous classifications are
accurate under the new rules. Most employers who carefully scrutinize
their employees' job functions probably will realize that they have
misclassified workers as exempt when they are in fact eligible for
Reevaluating Worker Classifications
When conducting this workforce reevaluation, employers will notice
that the new regulations continue to use a two-part test for the white
collar exemptions. Employees who are 1) paid above a specified salary
amount, and 2) perform certain defined job duties are exempt employees
and are not eligible for overtime pay. The DOL substantially increased
the minimum salary threshold. Now, to qualify for the white collar
exemptions, employees must be paid at least $455 per week (or $23,660
annually) on a salary basis - a substantial increase from the previous
tests of $250 per week and $155 per week.3
The new rules also establish streamlined, standard job duties tests,
which contain significant - but not overwhelming - changes from the
former tests addressing the executive, administrative, professional, and
outside salesperson exemptions (see Sidebar).
The rules provide more explicit definitions about each exemption, as
well as identify specific professions as generally exempt. For example,
insurance claims adjusters, financial service employees, team leaders of
major projects, and human resource managers usually will be exempt
administrators pursuant to the new regulations. Nonhourly registered
nurses, dental hygienists, physician assistants, accountants, and
athletic trainers generally will be exempt professionals.
Certain computer experts also continue to be exempt professionals
under the new regulations. No substantial changes were made to this
exemption, because it still applies to the small percentage of employees
working as computer systems analysts, programmers, software engineers,
or other similarly skilled workers in a computer field, who meet the job
duties specified in the regulations. Notably, to classify employees as
exempt computer professionals, the employer can either pay them on a
salary basis of at least $455 per week or on an hourly basis of at least
$27.63 per hour.
The regulations add a new type of exempt employee: the highly
compensated worker. An employee who performs office or nonmanual work,
earns total annual compensation of $100,000 or more, and customarily and
regularly performs at least one of the white collar exempt job duties
will not be eligible for overtime. The new regulations also add a new
category under the executive exemption to cover employees who are 20
percent or more equity owners in a business and who are actively engaged
in management. These exempt owner-employees are not required to meet a
minimum salary threshold to be exempt.
In addition to defining which workers are exempt, the new regulations
explicitly classify other employees as nonexempt and always eligible for
overtime. The DOL made it clear that blue collar workers (for example,
carpenters, electricians, mechanics, construction workers, and laborers)
are nonexempt, regardless of whether they receive a salary or how highly
paid they might be. Additionally, most police officers, firefighters,
emergency medical technicians, and other first responders are always
eligible for overtime.
The DOL established new rules and safeguards regarding an employer's
ability to deduct from an exempt employee's salary without losing an
employee's salaried status and the exemption. Employers now can suspend
without pay for one or more full days an exempt employee who violates
written workplace conduct rules without running afoul of the salary
basis rules. Previously, an unpaid disciplinary suspension had to be one
week or more to maintain an employee's exempt status. The DOL also
established a safe harbor for employers that protects them from the
effects of improper deductions from an exempt employee's salary. Now, if
an employer has a clearly communicated policy prohibiting improper pay
deductions that includes a complaint mechanism, and if the employer
reimburses employees for any improper deductions and makes a good faith
commitment to comply in the future, the employer will not lose the
exemption for an employee unless it willfully violates the policy.
Accordingly, attorneys will want to work with their clients to establish
and draft these new policies.
While the new rules make significant changes to the federal
standards, Wisconsin employers must be aware that the state wage and
hours law remains unchanged. Accordingly, if an employee is eligible for
overtime under Wisconsin law, the employee will continue to be eligible
after the new federal regulations go into effect. The Wisconsin
Department of Workforce Development (DWD) has stated that although it
will not issue new regulations by Aug. 23, it plans to issue an employer
advisory on its Web site, www.dwd.state.wi.us, and to the media before
the Aug. 23 effective date. Also, certain members of the U.S. Congress
have introduced legislation that has the ability to undermine the
effectiveness of the new rules.
How Wisconsin Law is Affected
The DOL's new overtime regulations altered only the federal law -
Wisconsin's wage and hour laws remain unchanged. A spokesperson for Gov.
Doyle indicated that the DWD is reviewing the new federal regulations to
determine their differences from the Wisconsin regulations and what
changes, if any, should be made.
If no changes are made to the state rules, Wisconsin employers must
comply with two sets of regulations regarding the white collar
exemptions. Currently, the Wisconsin regulations expressly defer to the
federal regulations.4 While this might
suggest that Wisconsin law would simply track the new DOL changes, the
DWD regulations still specifically use the same white collar exemption
language and tests from the old federal regulations, thus
creating a variance between the existing Wisconsin rules and the new
Whether an employee is eligible for overtime pay will require a
determination under both state and federal law, including an analysis of
which law offers greater overtime protection or eligibility for an
employee. The laws and regulations that provide the greater overtime
protections, whether federal or state, will be the ones that apply.
Several differences exist between the Wisconsin rules and the new
federal rules. One main difference is that to satisfy the executive,
administrative, or professional exemption test in Wisconsin, generally,
an employee cannot devote more than 20 percent (40 percent in a retail
or service establishment) of his or her time in a workweek to nonexempt
work. The new federal regulations do not have that restriction
and instead use a primary duty test. Employers, therefore, must analyze
their workforce under both rules to determine whether this percentage
restriction will afford greater or lesser overtime protection for a
While the federal and state duties tests for the executive,
administrative, and professional exemptions are similar in many aspects,
Wisconsin and federal law diverge with respect to the outside
salesperson exemption. Under Wisconsin law, an outside salesperson who
spends at least 80 percent of his or her time away from the employer's
place of business is exempt. The new federal rules, in contrast, contain
no percentage restriction. An employee is an exempt salesperson if he or
she is customarily and regularly engaged away from the employer's place
of business. Wisconsin law is more favorable to the employee because
under the Wisconsin regulations, a salesperson is less likely to qualify
for the exemption from overtime. Additionally, even though outside
salespersons are exempt from minimum wage requirements under federal
law, Wisconsin law requires that employers pay outside salespersons at
least minimum wage each pay period (even if they are exempt from
overtime and even if they are paid entirely on commissions).
Another notable difference between the two sets of laws is the
minimum salary threshold required for the white collar exemptions.
Wisconsin law has a much lower minimum salary requirement ($700 per
month for executive and administrative employees, and $750 per month for
professional employees) than do the new federal rules ($455 per week for
all white collar employees). The new higher salary threshold under
federal law will apply to Wisconsin workers. But, for example, the new
highly compensated exempt employee category under the new federal
regulations may not be applied to Wisconsin employees.
Wisconsin law, just like the federal law, requires exempt employees
to be paid on a salary basis. However, Wisconsin law does not define the
term "salary basis" in its regulations. Accordingly, the new federal
regulations that define and explain the salary basis test are the only
applicable rules for employers. Unless and until Wisconsin defines
salary basis, Wisconsin employers can follow the new federal rules
regarding the salary basis test, including when employers can lawfully
make deductions from salaried employees' wages, as well as the new safe
harbor provision for improper pay deductions.
Because the Wisconsin rules most likely will not have changed by Aug.
23, 2004, two applicable tests exist for the white collar exemptions.
Wisconsin employers and attorneys, therefore, have the unenviable task
of trying to classify employees under both laws. Employers will need to
review both Wisconsin and federal law and apply the law that affords
greater overtime protection to their employees.
Congress May Block the Regulations
With the Aug. 23, 2004, effective date looming, political battles
over the impact and implementation of the new overtime regulations have
heated up in Washington, D.C. The DOL defended its regulations by
stating that overtime eligibility will be "strengthened" for 6.7 million
workers under the new rules, including 1.3 million workers who will gain
overtime eligibility, while only 107,000 workers might lose overtime
protection.5 Opponents of the regulations,
led by Sen. Tom Harkin (D-Iowa), dispute the DOL's estimates and believe
that the new regulations contain too many loopholes and nuances that
employers could exploit, resulting in the loss of overtime protection
for millions of American workers.6 MIT
professor of management Tom Kochan estimates that a new category of
administrative employees, an ambiguous "team leader," could alone strip
overtime rights from between 750,000 to 2.3 million workers.7
Both sides of this issue are vigorously defending their stances -
after all, it is an election year and no party or group wants to be
viewed as taking away workers' overtime pay. According to a statement
Harkin issued, the "cosmetic changes in the final Bush rules amount to
putting lipstick on a pig. Make no mistake, this is still a pig."8 The political battles rage on as the Secretary of
Labor, Elaine Chao, indicated that her agency will strive to strengthen
overtime rights for workers by exposing this "misinformation campaign
against the rules."9
The politicians opposing the regulations want to block the
implementation of the new regulations. Such efforts gained ground on May
4, 2004, when the U.S. Senate approved an amendment (the so-called
"Harkin amendment") to a separate, unrelated corporate tax bill that
could block aspects of the new regulations from taking effect.
Whether this attempt to block implementing the regulations will
succeed is unclear. The Senate has yet to vote on the larger bill with
the new amendment attached. Furthermore, the House of Representatives
has not even addressed this issue. The DOL, as well as President Bush,
are committed to the new regulations and to their implementation.
Accordingly, even if the corporate tax bill or some joint legislation is
approved by both the House and the Senate, the President could still
veto the bill. However, Sen. John Kerry has indicated that if elected
President he would reverse the DOL regulations.
If the Harkin amendment becomes law, it would block the
implementation of only certain aspects of the new rules. The Harkin
amendment does not affect the increase in the minimum salary threshold
(the $23,660 amount) or any other changes that provide greater overtime
pay eligibility for workers. But it does prohibit the new regulations
from excluding any employee from overtime if under the old rules the
employee had been eligible for overtime - in effect, "grandfathering"
many employees. Such changes would create confusion for employers when
classifying their workforce, as employers would need to compare an
employee's overtime pay eligibility under both the old and new
regulations to determine which one was more favorable to the employee.
This may increase the likelihood of misclassification, which, in turn,
may increase the potential of litigation.
For now, employers and practitioners should remain aware of these (or
any future) legislative changes that could void aspects of the DOL's new
rules. At present, the Aug. 23 effective date still remains in place.
Whether election-year politics will overturn some or all of a portion of
the new rules remains to be seen.
Even if a portion of the new overtime rules are blocked, most
employers are long overdue in their analysis of outdated job
classifications and still have misconceptions regarding which employees
are eligible for overtime under the FLSA. Because of such misconceptions
and the short time for employers to prepare for the Aug. 23 effective
date, employers should not delay their analysis of their workforce's
eligibility for overtime pay under the new rules.
1Defining and Delimiting the
Exemptions for Executive, Administrative, Professional, Outside Sales
and Computer Employees; Final Rule, 69 Fed. Reg. 22,122 (April 23, 2004)
(to be codified at 29 C.F.R. pt. 541).
2Statement of Sen. Tom Harkin
(D-Iowa) on the Administration's Final Overtime Regs (May 4, 2004).
3Under the old regulations, an employer could
classify an employee as exempt using either a short or a long job duties
test. The short test had a higher minimum salary basis ($250 per week)
than the long test ($155 per week). The new DOL regulations, however,
eliminate the long and short tests in favor of one "standard" test.
4"These exemptions shall be
interpreted in such a manner as to be consistent with the Federal Fair
Labor Standards Act and the Code of Federal Regulations as amended...."
See Wis. Admin. Code § DWD 274.04 (Feb. 2004).
5Press Release of Labor Secretary
Elaine L. Chao, Harkin
Amendment Hurts Worker Protections (May 4, 2004).
of Sen. Tom Harkin (D-Iowa) on the Administration's Final Overtime
Regs (April 28, 2004); see also Economic
Policy Report on Overtime Pay (July 14, 2004).
7Ross Eisenbrey, On
the Department of Labor's Final Overtime Regulations, Testimony
Presented Before the U.S. Senate Committee on Appropriations (May 4,
8See supra n.
9See supra n.