Department of Labor Proposes Revisions To FLSA Regulations
8/12/2008
On July 28, 2008, the Department of Labor issued proposed regulations which, if adopted as a final rule, will revise regulations issued pursuant to the Fair Labor Standards Act of 1938 and the Portal to Portal Act of 1947. This Client Alert will address the proposed regulations.
Background
The Fair Labor Standards Act ("FLSA") requires covered employers to pay their nonexempt employees a federal minimum wage and overtime premium pay of time and one-half the regular rate of pay for hours worked in excess of forty (40) in a work week. The FLSA also contains a number of exemptions from the minimum wage and overtime pay requirements. The Portal to Portal Act amends the FLSA and specifies which activities are included in work time for purposes of minimum wage and overtime calculations.
Over the years, Congress has amended the FLSA in several respects, including increasing the minimum wage and refining or adding to the FLSA's exemptions. The Department of Labor, through its regulatory authority, has attempted perodically to clarify the minimum wage and overtime pay requirements. In addition, the statute and its regulations have been interpreted by the courts. The Department of Labor's Wage and Hour Division recently issued proposed regulations to update the regulations and conform them to the FLSA's amendments and court decisions. The more significant modifications to the regulations are discussed below.
Discussion of Modified Regulations
1. 2007 Amendments to the FLSA Minimum Wage
On May 25, 2007, the FLSA was amended to increase the federal minimum wage to $5.85 per hour effective July 24, 2007; to $6.55 per hour effective July 24, 2008; and to $7.25 per hour effective July 24, 2009. This legislation did not change the tip credit formula. Thus, the minimum required cash wage for a tipped employee under the FLSA remains $2.13 per hour. The maximum allowable tip credit for federal purposes under the FLSA increases as a result of the 2007 legislation, and is determined by subtracting $2.13 from the applicable minimum wage. The proposed regulations modify their current counterparts to reflect these amendments.
2. Small Business Job Protection Act of 1996
On August 20, 1996, Congress amended the Portal to Portal Act to define circumstances under which pay is not required for employees who use their employer's vehicle for home-to-work commuting purposes, and also amended the FLSA by creating a youth opportunity wage and modifying the allowable tip credit. The proposed regulations attempt to clarify these amendments.
a. Home-to-Work commuting in Employer's Vehicle
The current regulation, 29 C.F.R. § 785.9(a), explains the statutory provisions that eliminate from working time certain "preliminary" and "postliminary" activities performed prior to or subsequent to the workday. The proposed regulation clarifies that activities that are incidental to the use of an employer-provided vehicle for commuting are not considered principal activities, and, hence, are excluded from the calculation of work time, provided the activities meet the conditions of the amendment.
Current § 785.34 discusses whether time spent in travel is working time. The proposed regulation clarifies that the exclusion of commuting time applies only when the employer-provided vehicle is within the normal commuting area for the employer's business, and the arrangement is pursuant to an agreement between the employer and either the employee or the employee's collective bargaining agent.
b. Youth Opportunity Wage
The proposed regulation implements amendments to the FLSA by adding Subpart G, 29 C.F.R. § 786.300 et seq. Subpart G provides that an employer may pay any employee who is under 21 years of age, during the first 90 days after initial employment, a wage which is not less than $4.25 per hour. The proposed regulation prohibits employers from displacing employees, or reducing their hours, wages, or employment benefits, for the purpose of hiring workers at the reduced wage.
c. Minimum Wage Increase Act of 1996
Section 2105 of Title II of the Small Business Job Protection Act of 1996 amended the tip credit provisions of the FLSA, 29 U.S.C. § 203(m). Prior to the 1996 amendments, Subsection 203(m) required an employer to pay its tipped employees a cash wage equal to 50 percent of the minimum wage (then $4.25 an hour). The 1996 amendment provides that an employer's minimum cash wage obligation to its tipped employees is the minimum cash wage required on August 20, 1996, the date of the amendment's enactment.
Thus, the tipped wage was no longer tied to the minimum wage, and was effectively frozen at the pre-1996 amount -- 50 percent of the then-minimum wage of $4.25 per hour, or $2.13 per hour. The 1996 amendments base an employer's maximum allowable tip credit on a specific formula in relation to the applicable minimum wage. An employer may take a tip credit equal to the difference between the required minimum cash wage specified in paragraph 3(m)(1) ($2.13) and the minimum wage (now $6.55). Thus, the maximum tip credit that an employer currently is permitted to claim is $6.55 minus $2.13, or $4.42 per hour. (Effective July 24, 2009, the minimum wage required by the FLSA will increase to $7.25 per hour, resulting in a maximum federal tip credit of $5.12 an hour.).
The 1996 amendment affects certain regulations in 29 C.F.R. part 531. Current Section 531.50(a) quotes section 3(m) of the FLSA as it appeared before the 1996 amendments. To incorporate the 1996 amendment, the proposed regulation replaces the old statutory language with the current statutory provision. Current Sections 531.56(d), 531.59, and 531.60 refer to the pre-1996 statutory language setting the tip credit at 50 percent of the minimum wage. The proposed rule deletes or changes these references to reflect the current statutory requirements (tip credit equaling the difference between the minimum wage required by the FLSA and the $2.13 required tipped wage).
The statute requires that tipped employees be informed of the provisions of 29 U.S.C. § 203(m) before the employer can pay the reduced tipped wage. There are currently no regulations prescribing the content of the tip credit notice. The proposed regulation, 29 C.F.R. § 531.59(b), provides that an employer is ineligible to take the tip credit unless it has informed its employees that it "intends to treat tips as satisfying part of the employer's minimum wage obligation", and that the notice need not be in writing. In addition, the proposed regulation reiterates the statutory requirement that, in order for an employer to use the tip credit, the tipped employees must be permitted to retain all tips earned, with the exception of tips contributed to a valid tip pool.
3. Agricultural Workers on Water Storage/Irrigation Projects
On November 13, 1997, Congress amended section 13(b)(12) of the FLSA, 29 U.S.C. § 213(b)(12), which provides an overtime exemption for agricultural employees and employees employed to operate or maintain certain waterways used for supply and storing of water for agricultural purposes. The 1997 amendment deleted "water for agricultural purposes" and substituted "water, at least 90 percent of which was ultimately delivered for agricultural purposes during the preceding calendar year." Thus, this amendment makes the exemption from overtime pay requirements applicable to workers on water storage and irrigation projects where at least 90 percent of the water is used for agricultural purposes, rather than where the water is used exclusively for agricultural purposes. The proposed regulation updates the current regulations in 29 C.F.R. part 780, Subpart E to incorporate the statutory amendment.
4. Stock Options Excluded From the Computation of the Regular Rate
On May 2000, Congress amended §§ 7(e) and 7(h) of the FLSA. 29 U.S.C. § 207(e), (h). The amendment affected the calculation of the regular rate used to compute overtime pay. Under the amendment, income derived from employer-provided stock options, stock appreciation rights, or bona fide employee stock purchase programs meeting particular criteria, are excluded from the computation of the regular rate. The proposed regulation, 29 C.F.R. § 778.200 (a) and (b), incorporates the statutory amendments.
5. Fair Labor Standards Act Amendments of 1974
a. Service Advisors at Automobile Dealerships and Boat Salespersons
On April 7, 1974, Congress amended section 13(b)(10)(B) of the FLSA to add an overtime exemption for salespersons primarily engaged in selling boats (in addition to the pre-existing exemption for sellers of trailers or aircraft). The amendment also eliminated the overtime exemption for partsmen and mechanics servicing trailers or aircraft. The proposed regulation revises 29 C.F.R. §§ 779.371(a) and 779.372(a) to reflect the amendment's addition of boat salespersons to the exemption, and also clarifies that salespersons primarily engaged in selling trailers, boats, or aircraft, but not partsmen or mechanics for such vehicles, are covered by the exemption.
Section 13(b)(10)(A) of the FLSA exempts from its overtime pay requirements "any salesman, partsman, or mechanic engaged in selling or servicing automobiles, trucks or farm implements, . . . employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers." 29 U.S.C. § 213(b)(10)(A). The current regulation, 29 C.F.R. § 779.372(c)(4), excludes from the exemption service managers, service writers, service advisors, and service salespersons. Because court decisions uniformly hold that the regulation was an impermissibly restrictive construction of the statutory exemption, Subsections 779.372(c)(1) and (c) (4) are revised to include these employees within the definition of "salesman" subject to the overtime exemption.
b. Tipped Employees
As previously stated, under amendments to 29 U.S.C. § 203(m) enacted in 1974, employers may pay tipped employees a reduced wage (not less than $2.13) by crediting a portion of the employee's tips against the minimum wage obligation. Subsection 203(m) imposes conditions for taking the tip credit. An employer cannot take a tip credit unless (1) the employee has been informed by the employer of the provisions of Subsection 3(m), and (2) all tips received by such employee have been retained by the employee, unless a valid tip pooling arrangement is used. Further, if the total compensation (tips plus reduced wage) does not equal or exceed the full minimum wage, the employer must supplement the wage for the difference.
The proposed rule updates the regulations to incorporate the 1974 amendments, the legislative history, subsequent court decisions, and the Department's interpretations.
Wage and Hour opinion letters and its Field Operations Handbook provide that a tip pooling arrangement cannot require employees to contribute a greater percentage of their tips to the tip pool than is "customary and reasonable." The Department took the position that "customary and reasonable" equates to fifteen percent (15%) of an employee's tips or two percent (2%) of daily gross sales. See, e.g., Wage and Hour Opinion Letter WH-468 (Sept. 5, 1978). Several courts rejected the Department's maximum contribution percentages on the ground that "neither the statute nor the regulations mention [the ceiling on the tip pool contribution stated in the Department's interpretation] and the opinion letters do not explain the statutory source for the limitation that they create." E.g., Kilgore v. Outback Steakhouse of Fla., Inc., 160 F.3d 294, 302-03 (6th Cir. 1998).
Based on these court decisions and the statutory language, the proposed regulation amends 29 C.F.R. § 531.54 to clarify that section 3(m) of the FLSA does not impose a maximum tip pool contribution percentage. However, the proposed rule requires the employer to inform each employee of the required tip pool contribution, and reiterates that an employee's participation in a tip pool cannot bring the employee's wages below the minimum wage.
In addition, prior to the 1974 amendments to Subsection 203(m), employees could petition the Wage and Hour Administrator to review the tip credit claimed by an employer. The 1974 amendments abolished the review option. The proposed regulation eliminates the outdated regulatory provisions which still purports to permit petitions to the Wage and Hour Administrator for tip credit review despite the fact that the statute no longer provides for this review. See 29 C.F.R. §§ 531.7, 531.59. The language is updated to reflect that the statute imposes on the employer to burden to prove the amount of the tip credit to which it is entitled.
6. Fair Labor Standards Act Amendments of 1977
On November 1, 1977, Congress amended section 3(t) of the FLSA, 29 U.S.C. 203(t). Section 3(t) defines the phrase "tipped employee." Prior to the 1977 amendment, the definition encompassed "any employee engaged in an occupation in which he customarily and regularly receives more than $20 a month in tips." The 1977 amendment raised the threshold in section 3(t) to $30 a month in tips. The proposed regulations update the various references in the regulations to reflect the increase from $20 to $30 effected by the 1977 amendment.
7. Meal Credit Under Section 3(m)
The proposed regulations amend 29 C.F.R. § 531.30 to incorporate the Wage and Hour Division's enforcement policy regarding the voluntary acceptance of meals. A "wage" paid pursuant to Subsection 203(m) of the FLSA may include "the reasonable cost . . . to the employer of furnishing . . . board, lodging, or other facilities . . . customarily furnished by such employer to his employees." 29 U.S.C. § 203(m). "Facilities" include employer-provided meals. See 29 CFR § 531.32. The current regulation provides that an employer's ability to take credit for a facility is limited to those instances where an employee's acceptance was "voluntary and uncoerced." In other words, an employer could not take a wage credit for employees who did not choose to accept the meal.
Because several courts rejected the Department's position on this point, the Department adopted an enforcement policy providing that an employer may require an employee to accept a meal provided by the employer as a condition of employment, and may take credit for the actual cost of that meal even if the employee's acceptance is not voluntary. The proposed regulation amends 29 C.F.R. § 531.30 to reflect the previous court decisions and the Department's current enforcement policy on meal credits.
8. Section 7(o) Compensatory Time Off
In 1985, Congress added section 7(o), 29 U.S.C. 207(o), to the FLSA to permit public agencies to grant employees compensatory time off in lieu of cash overtime compensation pursuant to an agreement with employees or their collective bargaining agent. The statute provides that where compensatory time is used in lieu of cash overtime compensation, if an employee requests to use compensatory time, the employer shall permit the employee to use such time within a reasonable period after making the request if the use of the compensatory time does not unduly disrupt the operations of the public agency. 29 U.S.C. § 207(o)(5)(A), (B).
The current regulation, 29 C.F.R. § 553.25(d), requires that employee requests for compensatory time off be honored absent undue disruption and unreasonable burden on the agency's ability to provide services to the public. Several courts interpreted the language to mean that, if the employee provided adequate notice, the specific days requested must be granted unless the employer demonstrates that doing so would disrupt the agency's operations. In response to numerous contrary appellate decisions, the proposed rule modifies the current regulations, 29 C.F.R. § 553.25(c), to clarify that the statute does not require a public agency to allow the use of compensatory time on the day specifically requested, but only requires that the agency permit the use of the time within a reasonable period after the employee makes the request, unless the use would unduly disrupt the agency's operations.
9. Fluctuating Workweek Method of Computing Overtime
The proposed regulation would modify 29 C.F.R. § 778.114 to clarify the Department's regulations addressing the fluctuating workweek method of computing overtime compensation for salaried nonexempt employees.
The current regulation provides that an employer may use the fluctuating workweek method for computing half-time overtime premium compensation if an employee works fluctuating hours from week to week and receives, pursuant to an understanding with the employer, a fixed salary as straight-time compensation for whatever hours the employee is called upon to work in a workweek. An employer satisfies the overtime pay requirements if it pays the employee, in addition to the salary amount, at least one-half of the regular rate of pay for the hours worked in excess of 40 hours in each workweek. Because the employee's hours of work fluctuate from week to week, the regular rate must be determined separately each week based on the number of hours actually worked. The regular rate is the quotient of the weekly wage divided by the number of hours actually worked each week, including the overtime hours.
The proposed regulation clarifies that bona fide bonus or premium payments do not invalidate the fluctuating workweek method of compensation, but that such payments must be included in the calculation of the regular rate unless they are excluded under 29 U.S.C. § 207(e)(1)-(8). Under current law, these exclusions include gifts, vacation pay, reimbursed expenses, discretionary bonuses, retirement benefits and stock options and stock appreciation rights. The proposed regulation, by clarifying that these payments do not invalidate the fluctuating workweek method of overtime compensation and do not affect the calculation of the regular rate, eliminates any disincentive for employers to pay additional bonus or premium payments.
Comment Period
The Department of Labor will accept comments on the above proposed regulations on or before September 11, 2008, before the Department issues its final rule.
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