Understanding the new overtime laws: apartment firms and independent rental owners are advised to review their position descriptions and compensation levels carefully to ensure that employees are properly classified under the updated Fair Labor Standards Act.

A new U.S. Department of Labor (DOL) regulation has changed the way that covered employers, including apartment firms, calculate overtime pay. The rules, which went into effect on Aug. 23, 2004, are the first attempt to modernize the Fair Labor Standards Act (FLSA) in more than 50 years, and they could significantly affect the way many apartment firms compensate their employees.

The FLSA is a federal statute that regulates minimum wage, overtime work and child labor. Apartment firms with gross annual sales or business volume of at least $500,000, employ at least two workers and are involved in interstate commerce must comply with the regulations.

The revised regulations change the criteria for determining whether an employee is eligible for overtime pay or exempt from the FLSA's provisions. While the rules could raise payroll expenses for firms by increasing the number of employees entitled to receive overtime pay, the clearer definitions the rules provide are likely to benefit firms by making compliance easier and reducing potential liability.

The Regulations

The FLSA generally requires that employers pay their employees at least the federal minimum wage of $5.15--or more in some states and localities--and one and a half times the employee's regular pay for every hour worked in excess of 40 in a single work week. But some workers are exempt from those requirements, depending on the factors discussed below. Specifically, bona fide executive, administrative and professional employees aren't covered. Outside sales personnel, skilled computer workers and highly compensated employees are also exempt from these requirements. Collectively, these workers are "exempt employees."

DOL's updated regulations include three tests to determine whether an employee is eligible for overtime pay: 1) the salary test (compensation level); 2) the salary basis test (how compensation is calculated); and 3) the duties test. As these tests suggest, employees' job titles do not determine their exempt status; their salary and duties do. Thus, simply adding the word "manager" to employees' titles, for example, does not make them exempt from overtime unless their job duties truly reflect those of an exempt employee.

Independent rental owners who tend to hire fewer employees to perform wide-ranging responsibilities are particularly encouraged to perform regular compliance audits with attention to the following tests, as well as other related provisions of the FLSA rules dealing with housing benefits, recordkeeping requirements and properly determining overtime wages. An NAA/NMHC White Paper covering many of these issues is pending.

Test 1: Salary (Compensation Level). Generally, if employees earn less than $455 per week, or $23,660 annually, they are eligible for overtime pay even if the worker meets one of the exemptions discussed below. Conversely, if employees earn more than the $455 per-week threshold, they can be exempt from the FLSA's overtime requirement, but only if the employee also meets the salary, basis and duties tests.

Test 2: Salary Basis Test. Even if all employee earns $455 per week or more, the employee must also be paid on a salary, basis (rather than an hourly rate) and perform the duties of a bona fide exempt executive, administrative or professional worker to be exempt from overtime requirements. In other words, exempt employees generally must receive their full, predetermined salary, for any week in which they work, regardless of the number of days worked or how well they performed.

Test 3: Duties Tests. There are essentially three duties-related exemptions from overtime requirements: one for executive employees, one for administrative employees and one for professional employees.

1. Executive Exemption. To qualify as an exempt executive, an employee's "primary duty" must involve managing some aspect of the employer's business. Importantly, however, exempt executives do not need to spend all, or even half, of their time on exempt duties. Rather, the employee's executive-related "primary duty" must simply be the most important one the employee has.

The new rules include many examples of duties that qualify as executive in nature, including the authority to hire, fire, advance or promote. Even if the employee does not make the final decision on these matters, he or she may qualify, as exempt if he or she makes recommendations on such employment issues that carry "particular weight." Particular weight may be shown even if other employees have greater influence over such matters. That authority may be demonstrated where part of the employee's job is to make those recommendations or suggestions, and by the frequency with which they are sought or relied upon. Other examples of qualifying responsibilities include control over other employees' wages or hours, directing other employees' work, budget planning and responsibility, for legal compliance.

2. Administrative Exemption. To qualify, for the administrative exemption, an employee's primary responsibilities must involve "office" work or other non-manual duties that directly relate to the employer's operations or "management policies." Importantly, to be exempt, the employee must exercise independent judgment on important subjects. The test for determining whether an employee qualifies for this exemption is twofold. First, is the type of work performed related to the business's operations or management? Second, does the employee's primary duty involve exercising discretion regarding significant issues?

3. Professional Exemption. To satisfy the professional exemption test, an employee's primary duty, must be intellectual in nature, require "advanced knowledge" and involve the exercise of discretion and judgment. Advanced knowledge must cover a field of "science or learning" customarily acquired by specialized study The regulations note that both instruction and work experience may suffice in some cases; however, the professional exemption generally includes jobs in which employees acquire skills through education. Some examples cited by DOL are lawyers, doctors, scientists, teachers, engineers and registered nurses.

Highly Compensated Employees. In addition to the categories already mentioned, workers who earn at least $100,000 annually, and who are paid on a salary, basis, are also exempt from the overtime provisions so long as they primarily perform office work and "customarily and regularly" perform at least one duty of an executive, administrative or professional nature.

New Regulations Are Controversial

While the DOL has stated that its aim is to simplify the overtime regulations and to protect employees, the new regulations are controversial. Labor unions contend that the revised rules could cause workers to lose their overtime eligibility. Last year, the U.S. Department of Labor (DOL) estimated that only 100,000 workers would lose their eligibility, and that the changes will positively benefit about 6.7 million lower-wage workers.

On Capitol Hill, Sen. Debbie Stabenow (D-Mich.), along with 11 original cosponsors, has introduced a bill (S. 14) that would, among other things, eliminate any provision of the DOL regulations that would deprive overtime pay to workers who had been entitled to it under the old rules. In addition, the bill would raise the minimum salary threshold below which workers are non-exempt, and thus eligible to receive overtime pay, from $23,660 to $30,732 annually. Last year, House and Senate Democrats unsuccessfully attempted to block the DOL from receiving any funding to enforce the rules.

Despite some challenges to the regulations, apartment firms are reminded that the rules have already gone into effect and must be complied with. Attention surrounding the regulatory changes may lead to increased employee complaints to DOL, which will drive more DOL investigations surrounding the overtime changes and other aspects of the FLSA regulations.

Apartment firms are advised to review their position descriptions and compensation levels carefully to ensure that employees are properly classified for purposes of the FLSA and to perform regular compliance audits thereafter. Proactively consulting legal counsel and a professional human resources team regarding exempt and non-exempt status will help to avoid costly investigations and litigation in the future.

Betsy Feigin Befus is Director of Property Operations for the Washington, D.C.-based National Multi Housing Council (NMHC) and its joint legislative partner, the National Apartment Association. She can be reached at 202/974-2300 or [e-mail].