Effective October 1, 2006, Michigan’s minimum wage will increase from $5.15 per hour to $6.95 per hour. It will increase again next July 1 to $7.15 per hour, and then again to $7.40 on July 1, 2008. These changes quietly passed through the Michigan legislature and were signed into law by Governor Jennifer Granholm on March 28. They may appear to have only an economic impact on low-paid jobs, but the collateral consequence for Michigan employers who are also covered by the federal Fair Labor Standards Act (FLSA) is actually far more significant. Unless a recent bill to correct the problem passes the legislature by the two-thirds vote required for immediate effect, and is then signed by the Governor -- neither of which is assured at this writing -- overtime pay under Michigan law may soon be owed to employees who have been exempt from overtime under the FLSA. This impact may not have been contemplated by Michigan lawmakers when they increased the hourly rate -- certainly not by the Republican majority that proposed the measure.

Historically, the minimum wage and overtime provisions of Michigan law only applied to smaller employers who were not covered by the FLSA. Michigan minimum wage and overtime provisions do not apply to FLSA-covered employers unless the federal minimum wage rate (now $5.15 per hour) is lower than Michigan’s. For years, the state and federal hourly rates were identical, thus essentially mooting state law for Michigan employers. Despite recent politically charged efforts in Congress to raise the federal minimum wage, the likelihood of a federal matching rate in the near future is remote.

Michigan employers must now consider the possibility that, effective October 1, they will be subject to both state and federal minimum wage and overtime provisions. Generally, whichever law is more generous to the employee will control. Differences between the two wage and hour regimes may force many employers to now pay overtime because no parallel exemption exists under Michigan law. Also, unlike the FLSA, the hitherto littleused Michigan statute does not have a developed history with reported cases and other guidance to assist employers. If formal action does not occur prior to October 1, the possibility of mandatory overtime pay for otherwise FLSA-exempt employees will become a reality.

Michigan employers should be aware of these differences between state and federal minimum wage and overtime provisions:

“White Collar” Exemptions. While Michigan law, like the FLSA, exempts executive, administrative, and professional employees from mandatory overtime pay, the definitions of these categories differ – sometimes materially. For example, exempt “administrative” employees are limited in an obscure Michigan regulation to educational administrators, a much smaller category than exists under the FLSA. In addition, while the FLSA regulations explain the types of duties considered “management” for purposes of applying the white collar exemptions, no such guidance exists under Michigan law, leaving open the possibility that “exempt duties” will not be the same.

“Salary Basis” Test. Although both Michigan law and the FLSA require that exempt white collar employees (professional, executive, and administrative) be paid on a “salary basis,” Michigan law does not describe what, if any, deductions from salary are permissible without forfeiting the exemption. Under the FLSA, allowable deductions are defined in regulations and explained in U.S. Department of Labor opinion letters. Doctors, lawyers, teachers, designers, and computer analysts paid at least $27.63 per hour, do not have to meet the salary basis test under the FLSA. This is not necessarily so under state law, thus forcing Michigan employers to meet an ill-defined salary basis test for these employees and ensure that no salary docking for partial-day absences occurs for them (partial day pay would be allowable under the FLSA for these narrow categories).

Escape Hatches. Unlike federal law, Michigan law does not have an express “window of correction” or “safe harbor” allowing employers to correct inadvertent and improper pay deductions without losing the exemption. FLSA regulations allow employers to “tack” together or otherwise combine white collar exemptions under certain circumstances. No such parallel provision exists under state law. Highly compensated employees (paid over $100,000 per year) are assumed exempt under federal law upon a minimal showing of exempt duties. Under Michigan law they are not.

Laundry List Of Special Exemptions. Michigan law does not contain an overtime pay exemption for commissioned sales employees or outside sales employees – though express exemptions do exist under the FLSA for these workers. Similarly, federal regulations contain a laundry list of specific job categories that are exempt from overtime pay, with no parallel under Michigan law. Thus, beginning October 1, Michigan employers with workers in these categories may have to pay time-and-one-half for all hours over 40 (unless another state exemption can be used):

• Seasonal amusement or recreational employees, including those employed at camps, religious or non-profit educational conference centers, and the like. Michigan law only exempts summer camp workers employed up to four months.
• Drivers, helpers, mechanics, and loaders otherwise subject to regulation by the U.S. Department of Transportation.
• Employees of railroad carriers and airlines, and taxicab drivers.
• Domestic babysitters and companions.
• Newspaper delivery workers and employees of small-circulation newspapers.
• Radio and television technicians employed in rural or small markets.

Regular Rate Of Pay. Federal law provides alternative methods for computing the “regular rate” for employees who are entitled to overtime pay. For example, the “8/80” method is routinely used for healthcare workers and the “fluctuating work week” method for salaried non-exempt workers. No counterparts exist under Michigan law.

We are carefully monitoring legislative efforts in Lansing and Washington D.C. to address these concerns, and encourage employers to contact their elected representatives in the Michigan legislature regarding HB 6213. Nonetheless, Michigan employers should be prepared to audit their exempt and non-exempt classifications beginning October 1 if the minimum wage hike takes effect as currently mandated without further legislative action.

Margaret Carroll Alli

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