U.S. Department of Labor’s Fair Labor Standards Act (FLSA)
State Legislation May Affect Health Care Benefits in 2005
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U.S. Department of Labor’s Fair Labor Standards Act (FLSA)
In April 2004, the U.S. Department of Labor (DOL) issued new regulations that will have a meaningful impact on Indiana University. The following is an executive summary of these regulatory changes and the potential impact on the University.
Background on FLSA
Since 1938, when signed into law by President Roosevelt, the FLSA has provided the basic framework for how employers are to treat employees with regards to minimum wages, overtime payments and child labor provisions --- principles of employee entitlements that continue today. The DOL encourages compliance in many ways, including a web site that provides compliance tools for employers and employees, and toll-free numbers (1-866-4-USA-DOL) for contacting the DOL.
During FY 2003, the DOL’s Wage and Hour Division concluded FLSA investigations on over 32,500 cases, covering over 314,600 employees; with back wages collected for these FLSA cases totaling approximately $182 million, a 27% increase over the $143 million collected in FY 2002.
FLSA Overtime Provisions
(Minimum wages and child labor provisions are not covered by this summary)
Unless specifically exempted, employees must receive overtime pay(1) for hours worked in excess of 40 in a work week at a rate not less than time and one-half their regular rate(s) of pay. A “work week” is a fixed recurring period of seven consecutive 24-hour periods.(2) “Regular rates of pay” includes all remuneration for employment. When an employee works two or more different positions with different rates, the “regular rate” for the week is the weighted average of such rates. Where non-cash payments are made to employees in the form of goods or facilities, the fair market value of such goods or facilities must be included in the regular rate.
FLSA provides for certain employees to be exempt from recordkeeping and overtime pay provisions based on the following types of work: executive, administrative, professional, outside sales, and certain skilled computer professionals, as defined in DOL regulations.(3) (The DOL refers to this as “white-collar” exemptions.) The determination of “exempt” status is to be based on a position-by-position review of the duties assigned to an employee, how they are paid, and the amount paid on a weekly basis.
White-collar exemptions have three basic requirements in common: 1) the employee must perform work of an exempt nature; and 2) the exempt work must constitute the employee’s primary duties; and 3) the employee must be paid compensation on a salary or fee basis of at least a specified minimum weekly amount.
New FLSA Regulations, effective August 23, 2004
To adjust for outdated regulations and to incorporate many decades of case law, the DOL issued new FLSA regulations, to become effective on August 23, 2004.
The new FLSA regulations will reduce the number of positions that otherwise would qualify for exemption status. In summary, the new FLSA regulations for exemption status require a significantly higher minimum weekly salary and specify narrower definitions of exempt work. These new regulations also identify specific types of work that must receive overtime pay.
There are three FLSA tests for an employee to qualify for exemption status; all three tests must be satisfied for FLSA exemption status:
- Salary Basis test - employee must be paid a predetermined, fixed salary that is not subject to reductions due to quality or quantity of work performed
- Salary Level test - employee must be paid at least $455 per week (annual equivalent equals $23,660); the prior Salary Level test was $155 per week. Significant notes:
- Salary level is not prorated for part-time employees
- Salary level test does not apply to teachers
- Clear obligation to pay overtime to most employees who earn less that $455 per week
- Duties test - replaces the current “long and short tests” and includes new requirements and changes. The following exemption criteria are abbreviated highlights of the new regulations:
- Executive exemption: primary duty of managing the enterprise or a recognized department and directs the work of two or more full-time employees including either authority to hire/fire or make recommendations of significant weight to hire, fire, promote, etc.
- Administrative exemption: primary duty of performing work directly related to the management or general business operations of the employer and duties require discretion and independent judgment with respect to matters of significance
- Academic Administrative exemption: primary duty of performing administrative functions directly related to academic instruction at an educational institution
- Learned Professional exemption: primary duty is performing work requiring advanced knowledge in a field of science (i.e. law or medicine) that is customarily a standard prerequisite across a field of work; predominantly intellectual work that includes consistent exercise of discretion and judgment
- Other Professional exemptions: teachers who have a primary duty of teaching, tutoring, instructing, or lecturing at an educational institution
- Computer exemption: primary duty of applying systems analysis techniques and procedures or designing, developing, modifying and documenting computer programs; as an alternative to being paid on a salary basis, employee must be paid at least $27.63 per hour
- Outside Sales exemption: primary duty of making sales or obtaining orders for services and customarily and regularly works away from the employer’s place of business(4)
Indiana University Considerations
The DOL has stated that these new regulations “bring [FLSA] rules into the 21st century clarifying outdated regulatory language will help employees understand their rights and ensure they receive their hard-earned pay. Employers will be better able to understand their obligations and comply with law. The Labor Department will be equipped to more vigorously enforce the law.”
These new FLSA regulations will require that a number of Indiana University employees, who are currently classified as exempt from FLSA overtime pay and recordkeeping requirements, be changed to nonexempt status and become eligible for overtime pay.First, the DOL’s new FLSA regulations are very specific about some exemption criteria, such as a higher salary level test and types of work that must receive overtime pay.(5) Second, the new FLSA Duties test includes narrower definitions of exempt work. Changes in the FLSA Duties test include:
- clarification that working supervisors generally do not qualify under the FLSA Executive exemption
- managers, supervisors, assistant managers, etc. that qualify for the FLSA Executive exemption must have authority to hire/fire or make recommendations of significant weight to hire, fire and promote other employees (this exemption criteria also includes the management of a “recognized department”)
- positions that qualify for the FLSA Administrative exemption must exercise independent judgment with respect to matters of significance, as a primary duty.
In addition to considerations for the FLSA Salary Level test and the FLSA Duties test, for employees in positions determined to be covered by the FLSA Learned Professional exemption, Indiana University will need to verify the completion of the associated requisite advance degree and experience. If the requisite advance standard has not been completed, the employee will be changed to nonexempt status.
Next Steps for Indiana University
Outline of steps to be completed:
- The first priority is to identify the positions that potentially will be changed from FLSA exempt to nonexempt status. This list was distributed to associated departments in mid August 2004.
- Employees potentially affected will be asked to maintain work records starting Sunday, August 22, 2004,(6) until further notice
- For the potentially affected positions, departments will be asked to verify primary job assignments.
- HR offices would finalize the analysis of positions that need to be changed from FLSA exempt to nonexempt status during October/November 2004, and provide notice to the associated departments.
- Following the completion of conversion considerations, including rates of pay and benefit plan enrollments, the affected positions will be changed to FLSA nonexempt status at the beginning of February 2005.
- Retroactive transactions to pay the overtime portion(7) for all hours worked in excess of 40 in any work week from August 22, 2004, to the conversion date will be need to be processed by departments.
Employees affected by the above new FLSA regulations will receive addition information from the University.
All DOL compliance activity for Staff and Hourly positions will be addressed on a University-wide basis. FLSA exemption criteria should be applied in a uniform manner across all University campuses. (Regardless of any unique position titles at a campus, the FLSA status of work assignments should be identical across all of Indiana University’s operations.)
Additional information regarding this subject is posted on the University Human Resource Services’ web site.
|(1) Indiana University, as a governmental employer, can provide compensatory time based at one and one-half times, within specific limits.
(2) Indiana University’s work week begins and ends at midnight on Saturday.
(3) At Indiana University, Staff positions classified as PA and Academic positions are treated as being exempt from FLSA recordkeeping and overtime provisions.
(4) The Outside Sales exemption is not applicable to positions at Indiana University.
(5) Examples of a specific type of work that must receive overtime pay are police officers, sergeants and detectives.
(6) This is the beginning of the first work week at IU covered by the DOL’s new FLSA regulations, which become effective August 23, 2004.
(7) Overtime pay would be an additional one-half hour of pay, as the employee would already have been paid a salary for all hours worked.
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