It’s Time for a “Regime Change”: The Impact of the Proposed Overtime Regulations on the Lodging Industry
It’s Time for a "Regime Change":
The Impact of the Proposed Overtime Regulations on the Lodging Industry
Oregon Lodging Association’s "Lodging News"
August 2003
Finally, after more than 50 years, the federal government is updating the so-called "white collar" overtime regulations under the Fair Labor Standards Act. You will recall that these regulations determine when, and under what circumstances, executive, administrative and professional employees are entitled to overtime. Under the proposed regulations, which are currently under attack through a union-led attempt in Congress to block their implementation, the U.S. Department of Labor estimates an additional 1.3 million low-income workers will be eligible for payment of overtime. Given the huge number of wage-related lawsuits filed every year by Plaintiffs’ attorneys actively seeking out prospective clients, you cannot afford to ignore the law in this area.
To appreciate the significance of the proposed regulations, it is important to lay out the requirements under the existing regulations and the changes that will be made under the proposed regulations. This is best accomplished by looking at the three tests that are commonly applied to determine an employee’s eligibility for overtime payments. When reviewing these tests, it is important to keep in mind that each of these tests apply in differing degrees to the three main job classifications Ð executive, administrative, and professional. However, given the lodging industry context in which we are undertaking this analysis, the following will focus primarily on the impact of these tests to those employees working in an executive capacity (managers, assistant managers, etc.) and in an administrative capacity (bookkeepers, human resources personnel, etc.).
1. The "Salary Level" Test
Existing Regulations - The current regulations utilize a complex scheme requiring employers to determine an employee’s eligibility for overtime payments by applying short and long tests and differing salary levels to the different employment classifications. For many employers, sorting through these tests is very time-consuming and difficult. It is often easier and safer to simply pay overtime to any employee who may be close to meeting the tests to avoid the significant liability associated with failing to pay overtime when it is otherwise due.
Proposed Regulations - The proposed regulations adopt a much simpler "bright-line" rule. If an employee makes less than $425/week or $22,100/year, regardless of whether the employee is classified as executive or administrative, that employee must be paid overtime for all hours over 40 that the employee works in a week. For example, a night manager, who might otherwise qualify as an employee exempt from overtime based on the job description, must be paid overtime if he or she makes less than about $10.62/hour based on a 40-hour work week.
2. The "Salary Basis" Test
Existing Regulations - Employees paid on a "salary basis" must be paid their full salary on a weekly or less frequent basis with tight restrictions on when the employer can dock an employee’s salary for partial day absences and disciplinary reasons. Failure to comply with these restrictions can result in a loss of exempt status for an entire class of employees whose job duties are similar to an employee whose salary was improperly docked by the employer.
Proposed Regulations - The proposed regulations provide a new "safe harbor" to avoid loss of exemption under the circumstances described above. In short, the loss of exemption for an entire class of employees will be jeopardized if the employer engages in a pattern or practice of making improper deductions. The employer will also be allowed to reimburse the employee for improper deductions and take steps to avoid making such deductions in the future.
3. The "Duties" Test
Existing Regulations - The current regulations, once again, utilize a complex scheme requiring the employer to keep track of the percentage of an employee’s time devoted to particular tasks. The types of tasks that must be performed by an employee to qualify as an employee exempt from the payment of overtime are spelled out in the regulations and contain a requirement that the employee’s "primary duty" is management and that they spend at least 50% of their time on such duties. The 50% test can be avoided if the employee’s duties meet certain standards that are considered to be of particular importance to the business.
Proposed Regulations - The proposed changes to the duties test are perhaps the most significant changes impacting the lodging industry. This is because many properties have various different types of management job classifications such as catering manager, front desk manager, night manager, the various assistants to these managers, and others. The practical reality in the industry is that a front desk manager might spend much more than 50% of their time working the front desk checking in guests and providing other guest-related services. Under the existing regulations, the performance of these duties may result in a finding that these managers and assistant managers are entitled to payment of overtime regardless of their respective salary levels. However, under the proposed regulations, the "primary duty" test is significantly loosened.
For example, in addition to customarily and regularly directing the work of two or more employees, and having the authority to hire and fire employees or being charged with the responsibility to make recommendations regarding hiring, firing, job advancement, etc., executive employees are required to have the "primary duty" of "managing the enterprise." The proposed regulations eliminate the specific requirement that the manager spend 50% or more of their time on such duties, with limited exceptions. The proposed regulations specifically state that "an assistant manager whose primary duty includes such activities as scheduling employees, assigning work, overseeing product quality, ordering merchandise, managing inventory, handling customer complaints, authorizing payment of bills or performing other management functions may be an exempt executive even though the assistant manager spends the majority of the time on non-exempt work." As an example, the regulations refer to managers in the service industry who are routinely required to perform such work "as serving customers, cooking food, stocking shelves, cleaning the establishment or other non-exempt work." These provisions are easily applied in the lodging industry to the work performed by the various managers described above. Also, it is important to note that the exempt status of your bookkeeper and other administrative employees may also be impacted by the regulations due to the elimination of the "50% requirement" described above and other changes.
As you can see, application of both the existing and proposed regulations to your facility is highly fact intensive. Due to the significant penalties associated with violating these regulations, we strongly encourage lodging facilities to carefully review these tests with legal counsel to minimize the possibility of incurring such penalties.