Magazine article Government Finance Review

Fair Labor Standards Act: Public Sector Liability

Magazine article Government Finance Review

Fair Labor Standards Act: Public Sector Liability

Article excerpt

At an alarming rate, federal courts are holding state and local governments liable for back overtime pay to many of their management-level employees. These executive, administrative, and professional employees, often earning between $40,000 and $100,000 annually, were thought to be exempt from federal overtime requirements outlined in the Fair Labor Standards Act (FLSA). Recent interpretations of the act by the Department of Labor (DOL), as well as various federal court rulings, have turned such thinking on its head. Many public employment practices and public-sector duties have been found to allow these employees to be covered by the FLSA. This shifting of employee status has caused states and localities to be faced with enormous, unexpected liabilities. Millions of dollars already have been spent, and the potential liability could threaten most jurisdictions' fiscal solvency. (See the accompanying sidebar for details of the amounts of some settlements that have been made.)

The FLSA regulations determining which types of employees are entitled to overtime pay have become shrouded with ambiguous interpretations so that employers are finding it nearly impossible to judge who should and who should not be receiving overtime compensation. In addition, the provisions impair the ability of public employers to offer more efficient and flexible work schedules and compensation programs and often are in direct conflict with state and local government policies, public accountability laws, and administrative and executive duties.

Public Employee Exemption Under FLSA

The Fair Labor Standards Act of 1938 was a Depression-era enactment to combat unemployment and to help safeguard the standard of living for low-wage workers. President Roosevelt urged Congress "to help those who toil in factory and on farm to obtain a fair day's pay for a fair day's work." Minimum wage, overtime compensation, and child-labor standards were subsequently legislated, and the FLSA became the primary federal statute governing the payment of wages and hours worked.

As originally written, the FLSA applied only to the private sector. It was not until 1974 that the act was amended to include the public sector. This amendment was challenged in the U.S. Supreme Court case National League of Cities v. Usery. In this decision, the Court ruled that the 10th Amendment to the Constitution rendered the application of the FLSA to state and local governments unconstitutional. Nine years later, this ruling was reversed by the Supreme Court decision in Garcia v. San Antonio Metropolitan Transit Authority.

The application of the FLSA to the public sector has created a number of concerns for state and local governments, primarily revolving around the tests used to determine which employees are entitled to overtime pay. Under the FLSA regulations, an employee is either covered by the act - entitled to overtime pay for hours worked in excess of 40 in a given week - or exempt from the act and not entitled to overtime. To determine if an employee falls into the exempt category, both a salary basis test and a duties test must be met. As these tests were developed for the private sector and a manufacturing-based economy, their application to the public sector has posed many difficulties, thus bringing the exempt status of a large number of public employees into question.

Salary Basis Test. According to the FLSA regulations, an exempt employee must be paid on a salary basis, which is defined as a predetermined amount that is not subject to reduction because of variations in the quality or quantity of work performed. State and local public accountability statues, however, prohibit pay to public employees for hours not actually worked. Such public pay schemes therefore do not meet the requirements of paying an employee on a salary basis. Court cases, notably the Ninth Circuit case Abshire v. County of Kern, found that even the theoretical possibility of a salary being docked for an absence of less than a day is enough to destroy an employee's exemption - even if there had never been an actual deduction. …

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