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What Employers Need to Know and Do About the Labor Department's Final Regulations on Overtime Exemptions

Date: 4.22.2004

In an attempt to clarify and update the half-century old federal regulations defining the Fair Labor Standard Act's "white collar" exemptions, on April 20, 2004, the United States Department of Labor announced and released the final version of the Fair Pay Overtime Security for the 21st Century Workforce revised regulations. The final rules clarify the definitions of bona fide exempt employees under the executive, administrative, professional, outside sales, and computer employee exemptions (29 C.F.R. Sec. 541). The new regulations are scheduled to take effect on August 23, 2004.  

Even as commentary generated by the new rules rolls in, employers should determine the extent of the impact of the final rules on their current compensation practices. At a minimum, employers must analyze the new rules, conduct a compliance review of existing employee classification and pay practices, revise affected policies and practices in light of the new rules, and implement the changes throughout the workforce.  

The DOL's announcement comes more than a year after it proposed the white collar exemption revisions, which drew widely publicized commentary and were subject to criticism from employer and employee advocacy groups alike. The need for change was apparent, however, and the announcement of the new rules was much anticipated. As Wage and Hour Administrator Tammy McCutchen noted, "Updating these regulations is long overdue – the types of jobs people do and the skills they need have changed, but the regulations have not … The exemptions have engendered considerable confusion over the years regarding who is, and who is not, exempt."  

To reduce the confusion, the DOL has revised the tests for determining whether white collar employees are exempt from FLSA minimum wage and overtime requirements. The salary level for exempt employees has been raised to $455. The salary basis test has been rewritten to define situations when an exempt employee's salary status could be lost. The duties tests have been streamlined. In addition, the test for the outside sales exemption was modified to remove the percentage for nonexempt work activity, and the computer employee exemption was given its own section in the regulations.  

History of the DOL's Overtime Exemption Rules

The white collar exemptions are incorporated into the FLSA, which was enacted in 1938. Over the years, page upon page of federal regulations had been issued to define who would be subject to one of the "white collar" exemptions. The resulting maze of complex and lengthy regulations had remained essentially unchanged since 1949, confounding employers, employees, and the Department of Labor investigators and leading to innumerable court cases.

Many areas of the old white collar regulations were confusing and remarkably outdated. For example, the salary level tests used to determine whether an employee could qualify as a bona fide executive, administrative, or professional employee remained at levels barely beyond the federal minimum hourly wage. Like the outdated salary component of the test, the duties tests had not kept pace with the modernization of the workplace. For example, the bright-line tests for distinguishing between production and administrative employees were conceived to address industrial era production line jobs, not service and technology based jobs.

When it announced the proposed revisions, the DOL encouraged the public to submit written comments during a 90-day comment period, which ended on June 30, 2003. The public took the DOL's request seriously and inundated the Department with thousands of responses.

In the months that followed publication of the proposed regulations, the DOL considered the public comments and revised the proposed regulations. At the conclusion of what proved to be a slow and difficult process, the final rules were announced. Significant changes had been made to the final draft, indicating the DOL had weighed carefully the public's reaction and had released leaner, more flexible guidelines intended more closely to approximate the needs and concerns of 21st century employers and employees alike.  

Summary of the "FairPay" Rules

The FairPay rules do not alter the most basic requirements of the white collar exemptions, but, instead, realign the application of each basic requirement. The final rules redefine the salary level test, the salary basis test, and the duties tests for each exemption. Under the revised salary level test, exempt employees must receive at least $455 per week. The revised salary basis test clarifies the deductions that can be made from an employee's salary without loss of exempt status. The duties tests were revised to clarify whether duties truly are executive, administrative, or professional in nature.

Scope of the Exemptions

The new regulations clearly state that the exemptions do not apply to manual laborers or other "blue collar" workers. Non-management production line employees and non-management employees in maintenance, construction and similar occupations, such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers, are non-exempt under the current regulations and will remain so under the revised regulations.

The new regulations unequivocally state that the exemptions do not apply to "first responders," i.e., police officers, fire fighters, paramedics, emergency medical technicians and similar public safety employees, who perform work such as preventing, controlling or extinguishing fires of any type; rescuing fire, crime or accident victims; preventing or detecting crimes and similar work. These clarifying revisions regarding "first responders" are the result of considerable litigation over the exemption status of such employees.  

The Salary Level Test

Under the existing regulations, an employee earning only $8,060 per year (i.e., at least $155 per week under the "long" test) may be classified as "executive" or "administrative" and denied overtime pay. By comparison, a minimum wage employee earns about $10, 700 per year. The final rule nearly triples the current $155 per week minimum salary level required for exempt status to $455 per week, a $300 per week increase, or $23,660 per year (the proposed final rules had called for a minimum salary level of $425 per week.)

The final rule also adds a "highly compensated employee" test. Under this test, employees with "total compensation" of at least $100,000 per year will be considered exempt if, in addition, they: (a) receive at least $455.00 per week; (b) perform "office or non-manual work;" and (c) "customarily and regularly perform" any one or more of the exempt duties of an executive, administrative, or professional employee on a regular and recurring basis. The "highly compensated" test in the final rule includes a $35,000 increase over the $65,000 "super salary test" contained in the proposed revisions.

The Salary Basis Test

The salary basis test has been revised to provide much needed guidance regarding the type of deductions that will convert an exempt salaried worker into an overtime eligible employee. Generally, an employee's salary basis will be defeated if deductions from his or her predetermined salary are made for absences occasioned by the employer or by the operating requirements of the businesses. In other words, if an exempt employee is ready, willing and able to work, deductions may not be made for time when work is not available (if any work was performed in that work week). The final rules contain seven circumstances for permissible deductions to the salary of otherwise exempt employees:  

  1. Absence from work for one or more full days for personal reasons, other than sickness or disability; 
  2. Absence from work for one or more full days due to sickness or disability if the deductions are made under a bona fide plan, policy or practice of providing wage replacement benefits for these types of absences; 
  3. Offset for any amounts received as payment for jury fees, witness fees, or military pay;
  4. Penalties imposed in good faith for violating safety rules of "major significance;"
  5. Unpaid disciplinary suspension of one or more full days imposed in good faith for violations of workplace conduct rules;
  6. Proportionate rate of full salary for time actually worked in the first and last weeks of employment; and,
  7. Unpaid leave taken pursuant to the Family and Medical Leave Act.

The final rules also provide a "safe harbor" that will preserve an employee's exempt status in the event impermissible deductions are made. An exempt employee's salary basis will not be defeated if the employer: (a) has a "clearly communicated" policy prohibiting improper deductions, including a complaint mechanism; (b) reimburses employees for any improper deductions; and (c) makes a good faith commitment to comply in the future. This safe harbor is not available, however, if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. This test replaces the so-called "window of correction" for improper deductions, which was the subject of conflicting court rulings.

The Duties Tests

The complex and outdated duties tests under the existing regulations have generated such confusion that employers and employment lawyers, as well as DOL investigators, had difficulty determining whether an employee qualified for an exemption. While the outdated regulations discuss jobs that no longer commonly exist, such as key punch operators, legmen, straw bosses and gang leaders, the new revisions focus on jobs in today's workplace. 

Revised Duties Test: Executive Employee Exemption

An exempt executive employee's primary duty must be the management of the enterprise or of a customarily recognized department or subdivision. He or she must customarily and regularly direct the work of two or more other employees and have the authority to hire or fire other employees (or his or her suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees must be given particular weight). The final rule retains the "long" duties test requirement that an exempt executive must have authority to "hire or fire" other employees (or must make recommendations as to the "hiring, firing, advancement, promotion or any other change of status" which are "given particular weight"). To clarify the requisite degree of managerial influence, the final rule provides clarification of the term "particular weight." For example, if suggestions are frequently followed, this may suggest they are given particular weight.

Administrative Employee Exemption

An employee will meet the revised duties test for the administrative exemption if his or her primary duty is performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and, the primary duty includes the exercise of "discretion and independent judgment" with respect to matters of significance. Employers certainly will be disappointed to see the "discretion and independent judgment" standard that has caused so much confusion remain in the final regulations, despite its absence from the revisions proposed in March, 2003. Fortunately, the final rule provides a more detailed description of the types of duties that will satisfy this requirement than is present in the old regulations (e.g., Section 541.202, "authority to formulate, affect, interpret, or implement management policies or operating practices … carries out major assignments in conducting operations … performs work that affects business operations to a substantial degree … authority to commit employer in matters that have significant financial impact … waive or deviate from established policies and procedure without prior approval ….").

The final rules describe numerous positions that meet the basic requirements for the administrative exemption. The illustrative list includes insurance claims adjusters, financial services employees, and human resources professionals, as well as employees performing work in tax, auditing, marketing, quality control, and other fields. The fields of work and types of duties described as potentially exempt help to clarify the applicability of the exemption to positions that previously generated confusion for employers, employees, DOL investigators, and the courts.

Professional Employee Exemption

An employee is an exempt learned professional if his or her primary duty involves performance of work requiring advanced knowledge in a field of science or learning, which is customarily acquired by a prolonged course of specialized intellectual instruction. The rule defines "work requiring advance knowledge" as "work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment."  

The Outside Sales Exemption

The outside sales exemption has been clarified in the final rules, eliminating the confusing 20% test, which forced employers to compare the work and time of outside sales persons to that of the employer's nonexempt employees. The final rules do not add an exemption for inside sales employees.

The Computer Employee Exemption

Computer employees are exempt under the final rules essentially as in the existing regulations. They now are covered in their own section in the regulations.

Impact of the Final Rules

Based on its own economic analysis, the DOL concluded that the final rules guarantee overtime pay protection for all workers earning less than $455 per week ($23,660 annually), the new minimum salary level required for exemption. Because of the increased salary level, overtime pay protection will be strengthened for more than 6.7 million salaried workers who earn between the current minimum salary level of $155 per week ($8,060 annually) and the new minimum salary level of $455 per week ($23,660 annually). These 6.7 million salaried workers include:  

  • 1.3 million currently exempt white collar workers who will gain overtime pay protection;  
  • 2.6 million salaried white collar workers who are at particular risk of being misclassified as exempt;
  • and   2.8 million workers in blue collar occupations whose overtime pay protection will be strengthened because their classification as nonexempt, which is based on the duties tests under the current rules, will be automatic under the final rules regardless of their job duties.  

Based on these statistics and its review of the anticipated impact, the DOL has stated that its revisions to the white collar exemptions strengthen overtime protection for millions of low-wage and middle-class workers, while reducing litigation costs for employers. According to the DOL, everyone will benefit from the new rules: employees will be better able to understand and assert their right to overtime pay; employers will be more able to determine and carry out their compliance obligations; the DOL will be better able to enforce the law vigorously.  

What Employers Should Do Now

To avoid an encounter with the DOL's vigorous enforcement of the new rules for exempt employees, employers should act preventively to develop positive solutions for compliance. The 120-day period prior to the rules' effective date provides employers the opportunity to consult with internal human resource professionals, as well as inside and outside legal counsel, and formulate a detailed plan to address the changes.  

Now is the time to conduct a comprehensive review of all practices relevant to the FLSA and its interpretive regulations. This review should not be limited solely to matters involving the final white collar rules; it should cover all job classifications, whether exempt or not, and all pay practices.

The waiting period also provides a good opportunity to take steps to correct any irregularities or vulnerabilities revealed by the review and to explain to employees the reasons for any needed corrections.

As part of this action plan, employers should address five key components to an effective compliance program:  

  1. Assess the current salary levels of exempt employees to identify anyone who may lose exempt status under the $455.00 per week threshold. Management must determine whether the salary of employees identified in the assessment will be increased, or whether they will be reclassified as non-exempt.
  2. Examine and assess the job duties of exempt employees who meet the $455 per week salary level test, measuring those duties by the new requirements for one or more of the white collar exemptions. Employers may find that some employees who are currently classified as non-exempt now meet the exemption requirements. Conversely, though less likely, employers may determine some employees do not meet the exemption requirements and should be reclassified as non-exempt.
  3. Review pay practices for non-exempt employees to ensure they are paid for all hours worked. While the final regulations will not alter the DOL's regulations concerning inclusion of certain forms of extra compensation in the calculation of overtime for non-exempt employees, employers frequently violate the FLSA by failing to include shift differentials, on-call payments, non-discretionary bonuses, commissions and other forms of incentive earnings in non-exempt employees' overtime pay.
  4. Implement a policy explaining the salary program for exempt employees. The final regulations specify that improper deductions from an exempt employee's salary still can result in the loss of an otherwise valid exemption in the absence of a preventive policy. The exemption will not be lost if, among other things, the employer has a clearly communicated policy prohibiting improper deductions and incorporating a complaint mechanism. Such a policy should provide that deductions from an exempt employee's salary generally are prohibited and also should describe the exceptions to the no-docking rule. The complaint procedure should instruct employees that improper deductions are a serious violation of company policy. Employees should be directed to report any improper deduction to human resources.
  5. Implement a clear policy requiring that non-exempt employees record all working time, and that all recorded working time must be paid. This is particularly important given the dramatic rise in wage related collective actions in recent years and the prevalence of employer non-compliance issues.    

Resources for More Information and Employer Assistance

The Department of Labor has developed an extensive online outreach program available at www.dol.gov/fairpay. Included on the site are links to various components of the final rules, factsheets, an online training seminar, and other DOL guidance.

For immediate and long range employer assistance, Jackson Lewis attorneys are prepared and available to advise clients on all aspects of comprehensive wage and hour compliance planning, including a policy and practices audit under the existing and the new rules. For more information, please contact the attorney with whom you regularly work, or a partner in the Jackson Lewis Wage and Hour Compliance Practice Group. 

Side-by-Side Comparisons of the Current, Proposed and Final DOL Overtime Regulations

Minimum Salary Level for Exemption

Current Regulation

Proposed Regulation

Final Regulation

$155 per week

$8,060 annual

$425 per week

$22,100 annual

$455 per week

$23,660 annual

     

Summary of Salary Levels and Duties Tests

Annual Earnings

Current Regulation

Proposed Regulation

Final Regulation

Less than $8,060

Guaranteed Overtime

Guaranteed Overtime

Guaranteed Overtime

$8,060 to $13,000

Long Duties Test

Guaranteed Overtime

Guaranteed Overtime

$13,000 to $22,100

Short Duties Test for Higher Salaried Employees

Guaranteed Overtime

Guaranteed Overtime

$22,100 to $23,660

Short Duties Test for Higher Salaried Employees

Proposed Standard Duties Test

Guaranteed Overtime

$23,660 to $65,000

Short Duties Test for Higher Salaried Employees

Proposed Standard Duties Test

Standard Duties Test

$65,000 to $100,000

Short Duties Test for Higher Salaried Employees

Proposed Highly Compensated Test

Standard Duties Test

$100,000 or more

Short Duties Test for Higher Salaried Employees

Proposed Highly Compensated Test

Highly Compensated Test

Executive Employees Duties Test

Current Regulation (Short Test)

Proposed Regulation

Final Regulation

Whose primary duty consists of the management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; and  

Who customarily and regularly directs the work of two or more other employees.

With a primary duty to the management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;  

Who customarily and regularly directs the work of two or more other employees; and  

Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees will be given particular weight.

Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;  

Who customarily and regularly directs the work of two or more other employees; and  

Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees will be given particular weight.

Administrative Employees Duties Test

Current Regulation (Short Test)

Proposed Regulation

Final Regulation

Whose primary duty consists of the performance of office or non-manual work directly related to management policies or general business operations of the employer or the employer's customers; and  

Which includes work requiring the exercise of discretion and independent judgment.

With a primary duty of the performance of office or non-manual work related to the management or general business operations of the employer or the employer's customers; and  

Who holds a position of responsibility with the employer, defined as either (1) performing work of substantial importance or (2) performing work requiring a high level of skill or training.

Whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and  

Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.  

Professional Employees Duties Test

Current Regulation (Short Test)

Proposed Regulation

Final Regulation

Whose primary duty consists of the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study; and   Which includes work requiring the consistent exercise of discretion and judgment; or  

Whose primary duty consists of the performance of work requiring invention, imagination, or talent in a recognized field of artistic endeavor.  

With a primary duty of performing office or non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but which also may be acquired by alternative means such as an equivalent combination of intellectual instruction and work experience; or 

With a primary duty of performing office or non-manual work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. 

Whose primary duty is the performance of work requiring knowledge of an advanced type (defined as work which is predominantly intellectual in character, and which includes work requiring consistent exercise of discretion and judgment) in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or

Whose primary duty is the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Brett C. Bartlett, an associate in the Atlanta office of Jackson Lewis, provided assistance in the preparation of this article. 

Related Article:

Department of Labor Issues Final FLSA Overtime "White Collar" Exemption Regulations

 

 

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