Fair Labor Standards Act: 1996 salary basis test update.

• Author: Hartinger, Arthur A.
• Position: Includes related article on the Government Finance Officers Assn.'s activities related to the act

To avoid violating FLSA overtime pay requirements, state and local governments should be aware of current salary basis test requirements and pending litigation.

Since the Fair Labor Standards Act (FLSA) was extended to state and local governments in 1986, public entities have grappled with a host of compliance issues. For public entities attempting to balance their budgets and forecast future liabilities, FLSA compliance and litigation can be quite vexing. The financial impact of non-compliance can be devastating, as potential remedies include double backpay for three years with interest and attorneys' fees.

This article contains a brief discussion about one of the more controversial and troubling aspects of the FLSA - the requirement that all employees exempt from overtime compensation be paid on "a salary basis." The article is divided into four sections: 1) a summary background of the regulation, 2) a description of the current requirements of the salary basis test, 3) an update regarding the status of litigation, and 4) a checklist and recommendations for minimizing exposure to salary basis test litigation.

Background

The FLSA was adopted in 1938. One of the act's core provisions is a requirement that employers pay overtime compensation to employees working over a specified number of hours (usually 40) per workweek, unless the employees are exempt. When first enacted by Congress, the FLSA covered only private employers. In 1966, Congress extended the act's coverage to certain government employees, particularly hospital workers and employees in some local transit operations.

In the Fair Labor Standards Amendments of 1974, Congress attempted to extend coverage to all public employers. In the 1976 case National League of Cities v. Usery, the U.S. Supreme Court ruled that extending the FLSA to state and local government violated the 10th Amendment; however, the Court overruled this decision in 1985 in Garcia v. San Antonio Metropolitan Transit Authority. The Fair Labor Standards Amendments of 1985 made the act applicable to state and local public entities on April 15, 1986.

Since its original enactment in 1938, Congress has exempted certain "white collar" employees from the FLSA's overtime requirements:

The provisions of [wages] and [hours] ... shall not apply with respect to... any employee employed in a bona fide executive, administrative, or professional capacity... (as such terms are defined and delimited from time to time by regulations of the Secretary [of the U.S. Department of Labor (DOL)]. Thus, while Congress mandated that white-collar employees be exempt from overtime pay, Congress delegated to DOL the responsibility for defining and delimiting the exemptions. The FLSA itself makes no mention of a salary basis test.

In 1940, when the FLSA applied only to private employers, DOL established two categories of tests to determine whether employees qualify for the white-collar exemption: the duties test and the salary basis test. Simply put, the salary basis test requires that all exempt employees be paid "on a salary basis," where a salary is defined as a predetermined amount of weekly pay, regardless of quality or quantity of work actually performed.

In 1990, the Ninth Circuit issued its decision in Abshire v. County of Kern. The court held that fire battalion chiefs were not exempt because their pay was subject to the possibility of deductions for absences of less than one day. The holding in Abshire led to widespread litigation against public entities across the United States. As a result of public accountability principles and other aspects of public-sector pay systems, most public entities used "leave bank" systems which, when employees did not have sufficient leave, could theoretically result in a loss of pay. Under Abshire, such systems did not meet the salary basis requirement.

In September 1991, DOL published an interim final rule designed to eliminate the effect of Abshire. The rule provided that when employees' pay otherwise meets the salary basis requirements, then the possibility of deductions in pay...