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New Overtime Rules
(Simplification or Slavery)
General Business News
August 2003
New Overtime Rules
(Simplification or Slavery)
Iâve come to the conclusion that my television is broken. It must be since about all I hear these days is how the new Department Of Labor (âDOLâ) Fair Labor Standards Act (âFLSAâ) is designed to rook millions of hard-working men and women out of their just rewards. Specifically, the opponents of the new regulations claim that 8.5 million workers will lose their right to overtime compensation if the new regulations are instituted. Of course, the other side (i.e. the DOL) chooses to highlight their estimate that 1.3 million workers will automatically qualify for overtime pay if the policies are instituted somewhere around September 2003.
So whoâs right in this argument? Will the new standards subject 8.5 million Americans to a new form of slavery as opponents suggest or will 1.3 million Americans be freed from the slavery of working overtime without pay?
I canât honestly tell you who is right except to say the following:
1. The new rules will simplify the regulations by simplifying certain tests and more clearly defining certain terms and classifying certain occupations as generally exempt from overtime.
2. After reading the research I am certain that the proponents of the new rules are correct in their estimate of 1.3 million new workers subject to overtime pay. I am equally certain that the estimates of 8.5 million workers losing their right to overtime pay were determined using a reasonable methodology. Therefore, I donât intend on questioning that figure.
3. After weighing all the facts, it is my considered opinion that neither side has a full grasp on the effects of the rule changes and, therefore, any attempt at describing the real impact to you is not the intent of this article.
The bottom line is that the changes will impact a large portion of our labor force and you should have a working knowledge of what the DOL is likely to put in place barring Congressional intervention. Anything else is speculation and, in some part, an attempt by one side or another to use some facts and a lot of emotion to further their agenda. I donât intend on convincing you to feel one way or another about the new regulations.
So, whatâs changing?
There are quite a few changes in the regulations. They range from changes in definitions to changes in dollar levels and tests used to determine the exempt status of a particular employee. Letâs talk about the good news first.
Current regulations used to determine whether an employee is overtime exempt or not require certain tests to be met. One of those is a salary test. If an âadministrative or executiveâ employee earns $155 or more per week, and meets duties tests, they can be classified as overtime exempt. Likewise, âprofessionalâ employees that meet the duties tests can be classified as overtime exempt if they earn $170 per week. The duties test that must be met can be found by referring to a table prepared by the DOL comparing the new and old regulations. This table can be found in the new regulations to which a link is provided later in this article. If and when the new regulations come into effect, the new salary requirement for all three classifications of employee will be $425.
The salary levels just mentioned are if the employee meets what is known as the âlongâ test. A less restrictive test can be applied if the employee is paid a higher salary. To qualify for the âshortâ test, an administrative, executive or professional employee must be paid a weekly salary of at least $250. The new regulations set that amount at $425. It also eliminates the concept of short and long test and replaces it with one test.
While some of my penny pinching friends may feel that the $155 minimum was way too generous to begin with, I have to say that increasing the minimum dollar levels makes a great deal of sense. These levels were set in 1975 when the minimum wage was $2.10 and $250 would get you what today would take $854. While some would argue that the new levels should be even higher, the DOL chose the numbers based on their criteria and taking into account past precedents.
Oh, one other thing. Using the current minimum wage, the minimum wage a worker earns is $206.
Now that you have the good news, hereâs the bad stuff. Probably the biggest objection of opponents of the new regulations centers on naming names. Old DOL regulations listed only a few professions as qualifying under the âprofessionalâ category. This list has been greatly enhanced under the new regulations. For a detailed list, you can refer to the regulations for which a link is provided later in this article. These new âprofessionsâ do not necessarily require a full three or four year course of study to qualify as a profession. In some cases, no study is required, just sufficient experience to have gained a certain level of proficiency. By dropping the requirement for extensive training, opponents estimate that a massive number of workers will qualify for exemption from overtime under the new regulations. Even if these workers did not qualify as overtime exempt, most are in relatively high paying jobs and would meet the $425 threshold.
Another change opponents of the new regulations dislike is the automatic exemption of salaried employees who make over $65,000 per year â âif they perform one or more of the exempt duties or responsibilities of an executive, administrative or professional employeeâ as outlined in the new regulations. This amount includes all non-discretionary pay such as base salary, commissions, non-discretionary bonuses and non-discretionary incentive pay. Additionally, the employer must settle up with the employee not more than once a month. Boarding and lodging received by the employee does not qualify for inclusion in the $65,000.
While there are other changes, including those affecting outside sales persons and retail employees, the preceding items cover the major points. You can find the complete new regulations at the DOL website. It is available in an HTML version and a PDF version.
Thoughts
As I mentioned before, itâs probable that neither the opponents nor the proponents of the new regulations have things fully right. While more people are likely to be affected by the new regulations than the DOL suggests, the main report on this topic from the Economic Policy Institute assumes the vast majority of employers will opt to reclassify their hourly paid workers making more than $425 per week to salary basis and then contrive to make sure they meet the other related tests. I have no doubt that some employers will want to do this.
However, in counseling a client on their best course of action in any situation, I realize the client doesnât live in a vacuum. Sometimes it does make sense to do exactly what the Economic Policy Institute and the DOL assume employers will do â opt for the least costly treatment of employees. Many times, however, clients face competition for talented employees, even in todayâs economy. In these cases, it makes more sense to continue to classify employees as hourly and pay even the person who makes $80,000 overtime.
If you would like further information on these proposed rules, or have an issue relating to your current compensation plans, give us a call. Even with the simplification in these new rules, they are still complex and difficult to decipher. We can help you decode the regulatorese and put it in language and planning that you can understand.
Have a great August and please remember to keep our troops throughout the world in you thoughts and prayers.
So whoâs right in this argument? Will the new standards subject 8.5 million Americans to a new form of slavery as opponents suggest or will 1.3 million Americans be freed from the slavery of working overtime without pay?
I canât honestly tell you who is right except to say the following:
1. The new rules will simplify the regulations by simplifying certain tests and more clearly defining certain terms and classifying certain occupations as generally exempt from overtime.
2. After reading the research I am certain that the proponents of the new rules are correct in their estimate of 1.3 million new workers subject to overtime pay. I am equally certain that the estimates of 8.5 million workers losing their right to overtime pay were determined using a reasonable methodology. Therefore, I donât intend on questioning that figure.
3. After weighing all the facts, it is my considered opinion that neither side has a full grasp on the effects of the rule changes and, therefore, any attempt at describing the real impact to you is not the intent of this article.
The bottom line is that the changes will impact a large portion of our labor force and you should have a working knowledge of what the DOL is likely to put in place barring Congressional intervention. Anything else is speculation and, in some part, an attempt by one side or another to use some facts and a lot of emotion to further their agenda. I donât intend on convincing you to feel one way or another about the new regulations.
So, whatâs changing?
There are quite a few changes in the regulations. They range from changes in definitions to changes in dollar levels and tests used to determine the exempt status of a particular employee. Letâs talk about the good news first.
Current regulations used to determine whether an employee is overtime exempt or not require certain tests to be met. One of those is a salary test. If an âadministrative or executiveâ employee earns $155 or more per week, and meets duties tests, they can be classified as overtime exempt. Likewise, âprofessionalâ employees that meet the duties tests can be classified as overtime exempt if they earn $170 per week. The duties test that must be met can be found by referring to a table prepared by the DOL comparing the new and old regulations. This table can be found in the new regulations to which a link is provided later in this article. If and when the new regulations come into effect, the new salary requirement for all three classifications of employee will be $425.
The salary levels just mentioned are if the employee meets what is known as the âlongâ test. A less restrictive test can be applied if the employee is paid a higher salary. To qualify for the âshortâ test, an administrative, executive or professional employee must be paid a weekly salary of at least $250. The new regulations set that amount at $425. It also eliminates the concept of short and long test and replaces it with one test.
While some of my penny pinching friends may feel that the $155 minimum was way too generous to begin with, I have to say that increasing the minimum dollar levels makes a great deal of sense. These levels were set in 1975 when the minimum wage was $2.10 and $250 would get you what today would take $854. While some would argue that the new levels should be even higher, the DOL chose the numbers based on their criteria and taking into account past precedents.
Oh, one other thing. Using the current minimum wage, the minimum wage a worker earns is $206.
Now that you have the good news, hereâs the bad stuff. Probably the biggest objection of opponents of the new regulations centers on naming names. Old DOL regulations listed only a few professions as qualifying under the âprofessionalâ category. This list has been greatly enhanced under the new regulations. For a detailed list, you can refer to the regulations for which a link is provided later in this article. These new âprofessionsâ do not necessarily require a full three or four year course of study to qualify as a profession. In some cases, no study is required, just sufficient experience to have gained a certain level of proficiency. By dropping the requirement for extensive training, opponents estimate that a massive number of workers will qualify for exemption from overtime under the new regulations. Even if these workers did not qualify as overtime exempt, most are in relatively high paying jobs and would meet the $425 threshold.
Another change opponents of the new regulations dislike is the automatic exemption of salaried employees who make over $65,000 per year â âif they perform one or more of the exempt duties or responsibilities of an executive, administrative or professional employeeâ as outlined in the new regulations. This amount includes all non-discretionary pay such as base salary, commissions, non-discretionary bonuses and non-discretionary incentive pay. Additionally, the employer must settle up with the employee not more than once a month. Boarding and lodging received by the employee does not qualify for inclusion in the $65,000.
While there are other changes, including those affecting outside sales persons and retail employees, the preceding items cover the major points. You can find the complete new regulations at the DOL website. It is available in an HTML version and a PDF version.
Thoughts
As I mentioned before, itâs probable that neither the opponents nor the proponents of the new regulations have things fully right. While more people are likely to be affected by the new regulations than the DOL suggests, the main report on this topic from the Economic Policy Institute assumes the vast majority of employers will opt to reclassify their hourly paid workers making more than $425 per week to salary basis and then contrive to make sure they meet the other related tests. I have no doubt that some employers will want to do this.
However, in counseling a client on their best course of action in any situation, I realize the client doesnât live in a vacuum. Sometimes it does make sense to do exactly what the Economic Policy Institute and the DOL assume employers will do â opt for the least costly treatment of employees. Many times, however, clients face competition for talented employees, even in todayâs economy. In these cases, it makes more sense to continue to classify employees as hourly and pay even the person who makes $80,000 overtime.
If you would like further information on these proposed rules, or have an issue relating to your current compensation plans, give us a call. Even with the simplification in these new rules, they are still complex and difficult to decipher. We can help you decode the regulatorese and put it in language and planning that you can understand.
Have a great August and please remember to keep our troops throughout the world in you thoughts and prayers.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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