By Susan E. Prince, J.D.
Managing Editor, Business & Legal Reports, Inc.
BLR's survey Five-Minute Overtime Audit: See How Your Company's Reaction
to the New Overtime Rules Measures Up revealed some very interesting information
on how the recently revised Fair Labor Standards Act (FLSA) overtime regulations
have affected employers, and what actions employers have taken to bring their
companies into compliance with the law.
There were approximately 400 respondents to BLR's survey, representing companies
of various sizes from all over the U.S. Twenty-three percent of respondents
replied that they have less than 50 employees, 40% have between 51 and 250 employees,
15% have between 251 and 500 employees, and 21% have more than 500 employees.
The new FLSA rules regulating the exempt or nonexempt status of employees,
which were effective on August 23, 2004, are impacting many employers in the
U.S. The regulations have made a number of changes to the way in which employers
apply the FLSA tests and determine employees' exempt or nonexempt status.
The new rules regulate the exempt or nonexempt status of employees by redefining
the "white collar" exemptions for executive, administrative, professional,
outside sales, and computer employees. The regulations have also raised the
salary threshold for exemption almost threefold, to $455 per week. Many formerly
nonexempt employees may have become exempt under the regulations, or vice-versa,
due to the increase in the salary threshold and the changes to the various duties
In light of the complexity of the new rules, BLR asked respondents whether
they completely understand the interplay between the federal overtime laws and
the overtime laws in their state-and when to apply which law. Fifty-one percent
of the respondents reporting on this issue claimed that they had a complete
understanding of the new federal regulations and their interplay with state
law, 13% said they did not understand the laws well enough, and 36% claimed
they had a somewhat complete understanding.
Some states' wage and hour laws that guarantee more rights to employees than
the federal laws. As a rule, employers should follow the law that provides employees
with the most protection. It is important, though, that you are aware of any
regulatory and legislative changes that occur in your state. The new FLSA regulations
may prompt state officials to revise their own laws and regulations in the near
Fifty-seven percent of respondents to BLR's survey claimed that they did not
reclassify any employees from exempt to nonexempt due to the new federal overtime
regulations, while 26% stated that they reclassified less than 10 employees
and 14% stated that they reclassified between 11 and 50 employees from exempt
Eighty-three percent of respondents claimed that they did not reclassify any
employees from nonexempt to exempt due to the new federal overtime regulations,
while 13% stated that they reclassified less than 10 employees.
Increasing Salaries to $455
Raising exempt employees' salaries to $455 per week is one of the simplest
ways to handle the new salary levels. However, raising salaries may not be the
most cost-effective approach. Employers need to determine which would be less
- Raising employees' salaries to meet the test, or
- Paying the workers as nonexempt employees entitled to overtime.
Interestingly enough, 85% of respondents reporting on this issue stated that
they did not need to increase the salaries of any of their exempt employees
to the $455 threshold in order to keep their exempt status. Eleven percent of
respondents stated that they did have to adjust the salary of less than 10 employees
upward so that they would meet the threshold for exemption.
Limiting Overtime Hours
A method for controlling overtime costs for employees working for hourly wages
is to hold to a strict 40-hour workweek. BLR's survey revealed that 15% of respondents
reporting on this issue stated that they had placed substantial limits on overtime
hours to save money when they reclassified employees from exempt to nonexempt
after the new federal overtime regulations became effective, while 27% stated
that they put limits on overtime hours to save money to a small degree if they
reclassified employees from exempt to nonexempt.
Of course, prohibiting overtime work and refusing to pay for any extra hours
worked are two different things, and employers who fail to pay a nonexempt worker
for any overtime hours will violate the FLSA. The key to the strict 40-hour
workweek is having supervisors and managers who can monitor employees' work
habits and maintain a strict schedule. Employees should know from the start
that overtime hours are not permitted, and that abuse of work hours is reason
for discipline. If an employee does work unauthorized hours, he or she must
be paid so that the employer remains in compliance with the law. However, the
employer has the right to discipline the employee for the infraction.
Employers should also note that forcing workers to leave precisely at the end
of a shift could affect productivity or even quality if workers rush to finish
a job before the end of the day.
Department of Labor (DOL) Audits
In 2004, the DOL collected $197 million in back wages due to FLSA and FMLA
wage and hour and leave cases. Of this $197 million, over $165 million was collected
under the FLSA and only $2 million was collected under the FMLA.
Such audits are generally triggered either when a current or former employee
files a complaint with the DOL or when the DOL targets a specific industry for
investigation. As usual, in 2004 the DOL targeted a variety of low-wage industries
including day care, agriculture, janitorial services, the garment industry,
healthcare, the hotel and motel industries, restaurants, and temporary help.
The Wage and Hour Division has traditionally targeted low-wage industries with
vulnerable, and often immigrant, workforces, and those industries with a history
of chronic violations.
If the DOL decides it is going to audit your company, a DOL representative
will visit your facility to conduct interviews, make sure the required posters
are hung, and possibly examine the time clocks to determine whether your company
is in compliance with the FLSA. The DOL will then review up to 3 years' worth
of your wage and hours records and investigate your wage and hour practices
to determine whether you have paid your employees the proper amount of overtime.
This will include a review of your pay records, so you must make sure the records
are accurate and organized.
Where do you stand relative to other companies when it comes to DOL audits?
Fifteen percent of respondents to BLR's survey reporting on whether they had
been audited by the DOL for a wage and hour violation claimed they had been
audited once, while 5% stated they had been audited between two and five times.
Seventy-nine percent stated that they had never been audited.
It is interesting to note that when comparing the number of audits to the size
of a company, BLR's survey showed that the only companies that reported having
been audited more than five times were companies with more than 500 employees.
Auditing Your Company
As a result of the increased scrutiny of employer practices by the DOL and
plaintiff's attorneys, and the recent changes to the FLSA, many employers have
been conducting wage and hour audits to make certain their current policies
and practices conform to the new regulations. However, audits of this type should
not be limited to only those times that the laws change. Regular wage and hour
audits should be conducted for a number of reasons:
- To check for employees who have been misclassified in the past and who are
entitled to retroactive overtime pay
- To determine whether supervisors and managers are treating both exempt and
nonexempt employees appropriately under the law
- To avoid the possibility of costly lawsuits by addressing any problems with
your FLSA policies before they are brought to the attention of a lawyer or the
- To be able to show a DOL auditor or other legal entity that your company does
all it can to ensure compliance with the FLSA
- To ensure that job descriptions are up to date and accurately outline the
real duties employees perform each day
By conducting internal audits before a lawyer or government investigator shows
up at your door, you will be able to show that your company is proactive about
FLSA compliance. Internal audits decrease the chances that anyone would view
any errors in your past practices or policies to be willful violations of the
law-causing a pattern and practice of paying employees improperly.
So, how does your audit schedule compare to those of other companies BLR surveyed?
Twenty-nine percent of respondents reporting on this issue stated that they
audit their employee classifications yearly, 6% every other year, 2% every five
years, and 63% stated that they do not have a set schedule, but intend to continue
updating their classifications in the future.
When comparing audit schedules to the size of a company, BLR's survey showed
that of those companies that had established a yearly auditing schedule, 19%
had less than 50 employees, 39% had between 51 and 250 employees, 21% had between
251 and 500 employees, and 21% had more than 500 employees.
In addition, BLR's survey asked whether employers had reviewed their company's
job descriptions to determine whether they are still accurate, reflect the jobs
being performed, and reflect the skills necessary to perform the job. Forty-one
percent of the respondents reporting on this issue stated that they have reviewed
all of their job descriptions, 37% had reviewed some, 8% had not reviewed them
and do not plan to, and 14% had not reviewed them but plan to do so in the next
Employee Reaction to the New Regulations
In response to how employees reacted to any exempt and nonexempt reclassifications
that have occurred in the workplace due to the new overtime regulations, 11%
of respondents reporting on the issue stated that their employees were generally
pleased with the changes, 16% claimed that their employees were generally unhappy
with the changes, and 29% stated that their employees had no reaction to the
Some formerly exempt salaried workers may feel that their new nonexempt status
is a "demotion." HR and direct managers should reiterate explanations
that the new status refers only to the way their pay is calculated, not to their
relative position in the department or company.
Other newly nonexempt employees may find it hard to adjust their work routines
and continue to work through lunch or stay late. Supervisors must be aware of
these employees' work habits in order to avoid unanticipated increases in departmental
wage costs. Nonexempt employees must be paid for all time worked, whether or
not the supervisor specifically authorized the time.
Supervisors should make it a point to do "walk-arounds" or check
time cards daily to be sure nonexempt employees are not working through meal
periods or staying late. If habitual "offenders" are logging extra
time out of habit, supervisors should speak to them about adjusting their routines.
If the employees are struggling to meet workload demands, redistribution or
rescheduling may be in order.
In some cases, employers determined that a job once considered nonexempt is
now actually an exempt position. Employees often reject a change in status that
will cause them to lose the ability to earn overtime. Employers should discuss
any benefits of the new exempt position, including vacation or other benefits
that may be more generous or other privileges that exempt employees enjoy in
order to make their exempt status more appealing.