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Are You Complying With the New Overtime Rules?

To avoid potential lawsuits, make sure your policies are in line with current regulations.

Q: Our administrative employees--assistant managers, office managers, marketing staff, accounting staff--are paid a competitive salary and they have significant responsibilities. They occasionally work more than 40 hours in a week, but we do not pay them overtime. Is this permissible?

A: We continue to receive numerous questions from employers and employees about overtime. The number of lawsuits by administrative employees seeking to recover unpaid overtime has increased dramatically in the past couple of years. These lawsuits are typically based on federal wage and hour laws that were drafted in the 1930s and do not reflect the realities of today's modern workforce. But the U.S. Department of Labor has recently issued proposed regulations that, if adopted, will clarify employers' responsibilities with respect to overtime pay.

Under current federal law, an employer must pay employees one and a half times their regular rate of pay (overtime) for any hours worked by those employees in excess of 40 in a week. There are three major "white collar" exemptions to the overtime law: executives, professionals and administrative employees. Many of the disputes regarding overtime involve the administrative employee exemption. While disputes about the exemptions for professionals and executives occur, the application of those exemptions is not as uncertain as it is for administrative employees.

To qualify for the administrative exemption under current law, an employee must be paid a salary of at least $250/week. (A rarely used long test may apply if the employee is paid at least $155 per week.) Additionally, to meet the exemption, an employee's primary duty must consist of office or nonmanual work related to the employer's management policies or general business operations, and such work must require the exercise of discretion and independent judgment. This definition has spawned endless litigation and led to confusion about whether administrative employees should be paid overtime.

Administrative employees typically perform staff functions--advising management, planning, negotiation, representing the company, purchasing, marketing, business research and control. Routine clerical work will not qualify for the administrative exemption. To be exempt, administrative employees must have autonomous decision-making authority over important matters and that discretion must be a customary and regular part of their work. Until the proposed regulations are adopted, this test must be met to qualify for an overtime exemption. If your administrative employees are paid a salary of $250, perform nonmanual work related to management policies or operations, and routinely exercise independent judgment and discretion, they will likely qualify for an overtime exemption.

Determining whether the administrative exemption applies to a particular employee is a fact-intensive inquiry that varies from workplace to workplace. Consequently, accurately predicting whether a particular group of employees is exempt is sometimes difficult. The proposed regulations, if adopted, will provide some much-needed clarity. Final regulations are expected to issue in late 2003 or early 2004.

For administrative employees, the proposed regulations would eliminate the burden of proving the administrative employees consistently exercise independent judgment and discretion. That portion of the test would be replaced by a requirement that the administrative employee hold a "position of responsibility" with the employer defined as either: a) performing work of substantial importance or b) performing work requiring a high level of skill or training.

Under the new regulation, administrative employees supporting an employer's operations with regard to tax, finance, accounting, auditing, insurance, quality control, purchasing, marketing, business resources or public relations may qualify for the exemption. Additionally, the salary test under the new regulations would increase from $250 per week to $425 per week. That change will eliminate the overtime exemption for salaried workers earning less than $425 per week or $22,100 annually.

The proposed new regulations also offer a "safe harbor" exemption for highly compensated employees who earn at least $65,000 annually and perform at least one of the executive, administrative or professional functions. Once approved, this regulation will provide an exemption from overtime even if the employee is not paid a salary. This would be a welcome change for entities such as consulting firms, where work performed and employees' pay are typically linked to hours billed.

The proposed regulations will provide welcome clarity for overtime issues on a federal level. But until final regulations are issued, employers must continue to apply the current regulations to qualify for an exemption from overtime.

Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.


Larry Rosenfeld is co-chair of the national labor and employment practice of the law firm Greenberg Traurig LLP. A frequent writer and lecturer on employment law topics, Rosenfeld is experienced in the areas of federal laws pertaining to employment issues, EEOC, ADA, termination matters, employment liability and the Fair Labor Standards Act.

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