In August 2004, the Department of Labor’s (DOL) long-awaited, and often hotly debated, new regulations designed to update and clarify the Fair Labor Standards Act (FLSA) became effective. Culminating an effort begun in March 2003, the DOL action was proposed in an effort to update many outdated aspects of FLSA, as well as to increase the ease for employers, as well as the DOL itself, to properly interpret and apply the regulations of this Act. Despite a dramatically changed economy since its original adoption in 1938, FLSA regulations had previously remained largely unchanged.

WHAT is FLSA again?
As a brief refresher, the FLSA regulates employment in three primary areas:

1. minimum wage rate;
2. payment of overtime; and
3. child labor.

The FLSA generally requires employers to pay employees at least the federal minimum wage for all hours worked, and overtime premium pay of time-and-one-half the regular rate of pay for all hours worked over 40 in a single workweek. However, the FLSA includes a number of “white-collar” exemptions from the overtime requirements, such as employees qualified as “administrative,” “executive,” “professional,” and “outside salesman.” Understanding and properly applying the often-unclear definitions for these exemptions has historically been a source of much confusion for all affected parties, spawning a continuous flow of DOL penalties, assessments and related lawsuits. 

The new DOL regulations were developed and implemented in an effort to provide much-needed clarification as to which employees are eligible for exempt status. The minimum Federal hourly wage rate (currently $5.15/hour), requirement to pay overtime to non-exempt employees, and child labor provisions were unaffected by these changes.

WHAT really changed?
Under existing FLSA regulations, there are three requirements for an employee to be considered exempt from overtime – all three of which must be satisfied. They are:

1. a certain minimum level of weekly pay (the “salary level test”);

2. paid on a salary, rather than an hourly, basis (the “salary basis test”); and

3. performance of certain exempt duties (the “duties test”).

The salary basis test remains essentially unaffected; the primary impact of the regulation changes is in the salary level test and the duties test. Among the most significant changes are:

• An increase in the minimum salary level for exemption – Previously, the Act required only a minimum salary level of $155 per week, or $8,060 annually, to satisfy the minimum pay requirement of the exemption salary test – reflecting pay levels from the mid-1970’s when the minimum salary level was last increased. The new minimum salary level is $455 per week, or $23,660 annually.
  

• A new Highly Compensated Employees “bright line” test – The DOL created a new provision whereby any employee who does not perform manual labor, who customarily and regularly performs at least one duty of an executive, administrative or professional employee, and whose annual total compensation is equal to or greater than $100,000, is exempt from overtime pay. (Note that the compensation must still include a minimum salary level of $455 per week, per the minimum salary requirement.)
  

• Revisions to the duties test for both the Executive and Administrative – These two white-collar exemption categories have been revised to provide clarification of duty requirements, as well as to update and expand the list of examples provided in the regulations themselves as to correct, and incorrect, application of the tests. In many cases, this will make it significantly easier to make an exempt classification determination, while in some cases the determination may be more difficult. Certain of the changes have clarified non-exempt status for various positions, while others revisions may now open the door for an exempt classification previously not available.

WHAT is the impact of these changes?
Recent surveys by human resource organizations indicate that the vast majority of organizations expect the new regulations will have little effect on current exempt classifications or pay levels. The impact on any organization, however, will be dependent upon the make-up of its employee pool and the level of previous effort to understand the provisions of FLSA and correctly apply them. For example, in analyzing the impact of the regulations, the DOL estimates that 1.3 million workers – primarily in the retail and fast-food sectors, and often in the rural South – will need reclassification from exempt to non-exempt. However, one revision/clarification in the duties tests may also lead to certain employees in these same sectors being classified as exempt, under the “concurrent performance” principle, which eliminates disqualification due solely to performing non-exempt work concurrent with otherwise-qualifying exempt work.

Will the revisions provide clarity and overall simplification? The jury is still out, but the hope by many is that the regulations will make the exempt classification of jobs, and related compliance with FLSA, easier on all concerned.


The author, Brian P. Gilman, CPA, currently serves as the Director of Administration for Smith Debnam. Previously, he held executive positions in several industries, which included responsibility for Human Resource policy and compliance. To discuss further the possible impact of these amendments that went into effect earlier this year, please contact attorney John McNeill at (919) 250-2101, or e-mail jmcneill@smithdebnamlaw.com.

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An Intellectual Property Primer
Part 2:  Patents

In the last issue of Legal Insights you were introduced to a broad overview of intellectual property rights and the value such rights may have for businesses and entrepreneurs. This month we will take a more detailed look at one form of intellectual property protection -- patents.

Patent law can protect any “new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” A patent covers specific features of a product or steps of a process, as defined in the patent's claims, and the patent can be enforced to prevent competitors from offering those features or performing those steps. A U.S. patent owner has the right to “exclude others” from making, using, selling, or offering to sell the patented invention in the United States, or from importing the patented invention into the United States. The trade-off for receiving this exclusive bundle of patent rights is that you have to fully disclose your invention in a patent application. Patents are protected solely by federal law. With Internet-based businesses, where a product or service is unique, patent coverage may be particularly important. If your method of doing business is unique, you also may be eligible to obtain a patent on the particular business method, thereby making it impractical for others to copy your business concept. In order to obtain a patent an invention must be (i) new, (ii) non-obvious, and (iii) useful. Utility patent protection lasts for 20 years from the date your application is filed with the Patent and Trademark Office (or the earliest priority date claimed if the application is based on an earlier filed application). Design patents are a special category of patents that protect the new, non-obvious, and the ornamental design of a product and provide protection for a period of 14 years from the date the patent is issued. 

With respect to patents on pharmaceutical products, modifications to the patent laws have been made to balance the competing interests of pharmaceutical companies. The three phases of required clinical trials can take anywhere from four to ten years to complete. When the clinical trial phases are complete, a pharmaceutical company can then file a New Drug Application (“NDA”), which can take anywhere from an additional two to seven years for review and approval. As you can imagine, these processes can severely erode the duration of patent protection for a new or “pioneer” drug (recall that a patent is valid for 20 years after your filing date), so the pharmaceutical companies wanted longer patent terms for their pioneer drugs. On the other side are the companies that want to develop and market generic versions of those pioneer drugs. Ordinarily, in order to avoid infringement, the company wanting to develop the generic version would have to wait until the patent expired on the pioneer drug and then begin its own process of clinical trials and FDA approval. To balance the interests of the pharmaceutical companies, Congress passed the Hatch-Waxman Act in 1984. Under Hatch-Waxman, the term of a patent for a pioneer drug may be extended for up to five years to make up the time lost during the clinical trial process and FDA approval of the NDA. In exchange, manufacturers of generic drugs can (i) make use of a patented drug while the patent is still in force for the purpose s of gathering the data necessary to obtain FDA approval, and (ii) take advantage of a streamlined review process for generic versions by filing an Abbreviated New Drug Application (“ANDA”).

In the next issue of Legal Insights we will discuss trademarks and service marks.


If you have any questions regarding intellectual property rights, please contact John McNeill at (919) 250-2101, or e-mail at jmcneill@smithdebnamlaw.com. 

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Revised Act Expands Protections to Service Members Called to Duty

With the increased numbers of men and women serving our country, creditors should be mindful of the protections provided by law for those who have been called to active duty. Congress recently revised the former Soldiers’ and Sailors’ Civil Relief Act of 1940 into what is now called the Service Members’ Civil Relief Act (“SCRA”). Given the voluminous and at times confusing nature of the SCRA, creditors should reacquaint themselves with the protections afforded to service members and become familiar with the recent revisions. 

The purpose of the SCRA is to provide, among other things, for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the rights of service members during their military service. Generally, the SCRA applies to those service members who are involved in active military service. The SCRA provides protection not only to members of the Army, Navy, Air Force, Marine Corps and Coast Guard during their period of active military service, but also to those in the Public Health Service and the National Oceanic and Atmospheric Administration. In the case of the National Guard, active duty includes service under a call to active service authorized by the President or the Secretary of Defense for a period of more than 30 days. The SCRA applies only to civil and not to criminal proceedings. 

The SCRA incorporates and expands the protections of the previous Act. For instance, the SCRA provides a service member with the opportunity to temporarily suspend a Court proceeding for a minimum of 90 days if the service member’s military service requirements “materially affect” his ability to defend the action. The debtor may reapply for an additional stay if necessary, or may request the appointment of counsel to represent the service member in the proceeding. While the civil action is stayed, the SCRA provides that penalties shall not continue to accrue on the debt -- that is, the creditor may not continue to charge interest or other late charges on the account. In an effort to level the playing field for the parties, the SCRA further provides that the statute of limitations will automatically be tolled for both the creditor and the debtor while the service member is on active duty. This serves to maintain the status quo for the parties until the service member returns from active duty and is again in a position to defend against the lawsuit. A similar suspension or stay may be imposed by the Court if the service member’s military service impacts his ability to comply with a court order or judgment.

The SCRA also provides that prior to obtaining a default judgment, an affidavit must be filed by the creditor which states whether the defendant is in military service. For members of the reserves, Congress now affords an expanded period of time within which one may receive the protections of the SCRA. The prior act did not allow a reservist to seek the protections of the Act until the date that he or she reported for service. The SCRA now allows a reservist to seek the protections of the Act from the time that he or she receives notice to report for military service. 

Creditors also must be aware that the SCRA extends protections not only to those directly called to military service, but also to dependents and those who may be secondarily liable for a debt. The SCRA has expanded the definition of a dependent to include a service member’s spouse, child or an individual receiving more than half of his or her support from the service member. The SCRA also extends protections in certain situations to sureties, guarantors, or others who may be secondarily liable for a debt. 

Another provision of interest is the “six percent rule.” This section may apply to obligations ranging from credit card accounts to vehicle loans, and provides for a maximum rate of interest on debts incurred before military service. The SCRA provides that an obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred before the service member enters military service shall not bear interest at a rate in excess of 6 percent per year during the period of military service. The interest at a rate in excess of 6 percent per year that would otherwise be incurred but for the obligor’s military service is forgiven. 

The SCRA provides that the service member may apply for the interest rate cap by providing written notice to the creditor within 180 days of the termination of the debtor’s military service. In the event such a notification is received, the interest rate cap is retroactive to the first day of service.
Can a debtor or co-obligor waive his or her rights under the Act? Yes, but only after military service commences. The debtor cannot waive his or her rights within the boilerplate language of the original contract. The waiver must be in a separate writing. It is important to note that the following actions require written waivers if a debtor is in active military service:

1) modification, termination, or cancellation of any contractual obligations; or

2) repossession, foreclosure, or taking possession of property that is security for any obligation or was purchased or received under the service member’s contract with the creditor.

The SCRA also provides protections in the extension and preservation of credit. The application by a service member for the stay, postponement, or suspension of any obligation pursuant to the Act may not, in and of itself, provide the basis for:

1) a denial or revocation of credit;

2) a change in the terms of an existing credit arrangement, unless requested or consented to by the service member debtor; or

3) an adverse report relating to the creditworthiness of the service member.

The above highlights some of the potential issues that may be confronted by a creditor when dealing with a service member called to duty. Whenever there is reason to believe that an individual is a service member, a creditor should proceed with extreme caution. Failure to familiarize oneself with the content of the SCRA and abide by its provisions may result in statutory penalties. If you have occasion to extend credit to members of the active military service, we encourage you to contact legal counsel when confronted with situations involving the various provisions of the Service Members’ Civil Relief Act.

If you have any questions about the Service Members’ Civil Relief Act, please contact Tom Gray or Connie Carrigan at (919) 250-2000 or by e-mail tgray@smithdebnamlaw.com or ccarrigan@smithdebnamlaw.com.

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