Contractors: Beware Of New Overtime Rules

May 13, 2004
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Last month the United States Department of Labor (DOL) issued its long awaited and highly controversial revisions to the federal regulations defining who is, and who is not, exempt from overtime pay.

In the big picture, DOL did not address the unique job requirements of service technicians in the HVACR industry. However, it is highly unlikely - in most cases - that service techs will satisfy any of the exemptions under the new rules, even if they are paid more than $100,000 a year. In fact, the so-dubbed "Fair Pay Rule" virtually guarantees overtime pay for all blue-collar workers.

The best suggestion for HVACR employers is that they become familiar with their obligations under the new Fair Pay Rule, develop written position descriptions for all of their employees, and ensure that their employees are correctly classified as exempt or non-exempt prior to the rule's effective date, which is August 24, 2004.

Misclassifying employees can expose employers to significant liability, including back pay, civil penalties, and attorneys' fees.

Overview Of New Ruling

Before coming up with the April 20 ruling, DOL received and considered over 75,000 comments in response to the proposed rules issued last year.

While the changes made to the eligibility tests for the so-called white-collar exemptions are relatively minor, the new Fair Pay Rule guarantees overtime pay for employees earning less than $455 per week (or, $23,660 per year) and establishes a new exemption for employees performing non-manual jobs who earn a salary of $100,000 or more a year.

In addition, as under the current rules, the new rules state that simply paying an employee an annual salary (rather than an hourly wage) will not guarantee that the employee is exempt from overtime. The Fair Pay Rule requires the employer to analyze the employee's duties and responsibilities in order to determine whether one of the exemptions applies.

In the end, HVACR employers should become familiar with the modified white-collar tests, summarized in this article, and evaluate the job requirements of each position in their companies in order to determine whether the position is exempt or non-exempt under the new rule. (Note: DOL has established a new "Fair Pay" section on its Web site, www.dol.gov, to assist employers in understanding their obligations under the rule.)

White-Collar Duties Tests

The new regulations retain the three major white-collar exemptions: the "executive" exemption, the "administrative" exemption, and the "professional" exemption, which is divided into the (i) "learned professional" exemption and (ii) the "creative professional" exemption.

The duties test for each of these exemptions is summarized below. These exemptions also apply only if the employee is paid an annual salary of more than $23,660 per year. Employees who are paid more than $100,000 per year are exempt from overtime if they "customarily and regularly" perform one or more of the duties in the tests described below, which come directly from the regulations.

Executive exemption duties test: To qualify for the "executive" exemption from the overtime rules, an employee must satisfy all of the following criteria:

  • "The employee's primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

  • "The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and

  • "The employee must have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight."

    Provided all of the above criteria are met, examples of positions that will likely satisfy the executive exemption include: chief executive officer, chief financial officer, director of operations, director of purchasing, and director of sales. Note, however, that the Fair Pay Rule expressly provides, "A job title alone is insufficient to establish the exempt status of an employee." Rather, the job duties actually performed by the employee must be evaluated - and preferably documented in a written position description - to determine the employee's status.

    This important concept also applies to the administrative and professional exemptions, which are summarized below.

    Administrative exemption test: An employee will satisfy the administrative exemption to the overtime laws if both of the following requirements are met:

  • "The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and

  • "The employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance."

    The second part of this test - that is, determining whether the employee exercises "discretion and independent judgment with respect to matters of significance" - will likely cause considerable debate among wage-and-hour auditors, employers, and their attorneys.

    Indeed, many commentators had urged DOL to abandon the "discretion and independent judgment" test precisely because it is vague and susceptible to different interpretations, particularly in a service-oriented economy that requires virtually all employees to exercise some discretion and judgment in performing their jobs. Hopefully, DOL - rather than the courts - will provide further guidance on this important issue.

    Positions that will likely satisfy the administrative exemption include: office manager, executive assistant to the CEO, human resources manager, and safety manager.

    Professional exemption: As mentioned above, the Fair Pay Rule carves out two subparts to the professional exemption: the "learned professional" exemption and the "creative professional" exemption.

    While there had been some speculation that HVACR techs and other highly skilled workers might qualify for this exemption under the new rule, DOL has clarified that this exemption is not available to those employees who perform manual, mechanical, or physical work. HVACR employers should consider, however, whether other employees on their payrolls might satisfy these exemptions.

    To qualify for the "learned professional" employee exemption, the following tests must be met:

  • "The employee's primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work, requiring the consistent exercise of discretion and judgment;

  • "The advanced knowledge must be in a field of science or learning; and

  • "The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction."

    To qualify for the "creative professional" employee exemption, the following test must be met:

  • "The employee's primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor."

    Study Up

    Information about other exemptions that may be of interest to HVACR employers includes the "outside salesman" exemption and "computer exemption." Information on these exemptions may be found on DOL's Web site, www.dol.gov.

    Attorney Laurie T. Baulig is with Gurne, Porter & Baulig, PLLC, Washington, DC. Baulig can be reached by e-mail at lbaulig@gurnelaw.com.

    Publication date: 05/17/2004

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