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What Employers Need to Know and Do About the Labor Department's Final Regulations on Overtime Exemptions
On April 20, 2004, the U.S. Department of Labor, Wage and Hour Division, issued the new exempt status rules for "white collar" employees under the Fair Labor Standards Act (29 C.F.R. Sec. 541, et seq.). The revised regulations have modernized the standard to determine whether executive, administrative, professional, outside sales and computer employees are exempt from the overtime requirements of the FLSA. As Wage and Hour Administrator Tammy McCutchen said last year, when revisions to the white collar exemptions initially were proposed, "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," she explained "have engendered considerable confusion over the years regarding who is, and who is not, exempt." This confusion has resulted in costly litigation and burdensome liability.
To reduce the confusion, the DOL revised the tests for determining whether an employee is exempt under the white collar exemptions. The salary level for exempt employees was raised to $455. The salary basis test was rewritten to define situations when an exempt employee's salary status could be lost. And, the duties tests for all three white collar exemptions have been streamlined. At long last, the antiquated white collar exemptions may now be comprehensible to employees and employers alike.
The DOL's Motivation to Revise the Rules
The Wage and Hour Division has explained why it was motivated to revise the rules defining the white collar exemptions:
The final rule will restore overtime protection for lower-wage workers, strengthen overtime protection for middle-income workers including first responders, and reduce costly and lengthy litigation. Both workers and employers will benefit from having clearer rules that are easier to understand and enforce. More workers will know their rights and if they are being paid correctly, more employers will understand exactly what their obligations are for paying overtime, and clearer more up-to-date rules will help the Wage and Hour Division more vigorously enforce the law, ensuring that workers are being paid fairly and accurately.
In the Preamble to the final regulations, the DOL reiterated its warning that the revisions are not issued as a safe-haven to employers:
Confusing, complex and outdated regulations allow unscrupulous employers to avoid their overtime obligations and can serve as a trap for the unwary but well-intentioned employer. In addition, more and more, employees must resort to lengthy court battles to receive their overtime pay. In the Department's view, this situation cannot be allowed to continue.
Employers must recognize that the revised regulations were motivated by the intent to clarify antiquated and complex rules, but are not meant to diminish employers' responsibilities to pay minimum wage and overtime as the Fair Labor Standards Act requires.
Impact of the Final Regulations
The DOL has commented about the impact the final regulations will have on employees and employers. Among those comments, according to the Department's Regulatory Impact Analysis, are the following key points:
- Raising the salary level test to $455 will strengthen overtime protection for more than 6.7 million salaried workers who were exempt previously because they received a salary of $155 or more (but less than $455 per week). Regardless of their duties, these supervisory, administrative or professional employees will be entitled to overtime pay when working over 40 hours in a work week.
- The 6.7 million workers are comprised of 5.4 million who already are nonexempt and 1.3 million who currently are exempt, but who will lose their exempt status with the implementation of the new regulations.
- Updating and clarifying the rule will reduce violations of the white collar regulations and are likely to save businesses at least $252.2 million per year.
- Updating and clarifying the rule will reduce human resources and legal costs for classifying workers (particularly for small businesses) and the need to defend those decisions. Reduced litigation costs and liabilities could make capital available to create job opportunities.
- Updating the rules will be a catalyst for compliance. Employers who may not have undertaken an audit of the classification of their workforce are more likely to do so after the promulgation of the final rule, resulting in greater levels of compliance with the law.
When Will the Revisions be Effective?
The revised regulations will be effective 120 days after they are published in the Federal Register, which has not occurred. A bulletin will be issued when the publication date becomes available.
Summary of the DOL's Final Rules Regarding the White Collar Overtime Exemptions
The Statutory Definitions of the "White Collar" Exemptions Have Not Changed: Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees who are employed in a bona fide:
- Executive;
- Administrative;
- Professional; or
- Outside Sales capacity.
In addition, certain computer employees may be exempt professionals under Section 13(a)(1) or exempt under the test set forth in Section 13(a)(17) of the FLSA. While the statutory definitions have not changed, the federal regulations interpreting the exemptions have been revised. Specifically, the three tests for determining whether an exemption applies have been updated and clarified. The three tests, summarized in the following, are:
- The Salary Level Test
- The Salary Basis Test
- The Job Duties Test
Salary Level Test - 29 C.F.R. Sec. 541.600
The minimum salary level has been increased to $455 per week.
Highly Compensated Employee Test - 29 C.F.R. Sec. 541.601
Employees with "total compensation" of at least $100,000 per year (i.e., a 52-week period) will be considered exempt if:
- They make at least $455.00 per week ($23,660/year);
- They perform "office or non-manual work"; and,
- They "customarily and regularly perform" any one or more of the exempt duties of an executive, administrative, or professional employee.
Total Compensation that will satisfy the $100,000 test for a highly compensated employee includes:
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- Commissions
- Nondiscretionary bonuses
- Other nondiscretionary compensation earned during a 52-week period
Total Compensation does not include:
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- Credit for board, lodging, or other facilities
- Payments for medical or life insurance
- Contributions to retirement plans or fringe benefits
"Make-up Payment" and "Pro-Rating" to meet the $100,000 test
If an employee's total annual compensation does not equal $100,000 by the end of the calendar year (or pre-set 52-week period):
- The employer may, within one month after the end of the year, make one final payment to reach the $100,000 level; or
- The employee will be tested for exempt status under the standard duties and salary tests.
Also, the $100,000 may be pro-rated for employees who do not work the full year and the employer may choose any 52-week period to test for the $100,000 total compensation.
A highly compensated employee is exempt only if he or she performs "office or non-manual work."
The highly compensated test is not applicable to:
- Non-management production line workers
- 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
- Other employees who perform work involving repetitive operations with their hands, physical skill and energy
Highly compensated employees must customarily and regularly perform exempt duties. Such duties must be performed:
- With a frequency that must be greater than occasional, but which may be less than constant
- Normally and recurrently every workweek
- Does not include isolated or one-time tasks
Salary Basis Test - 29 C.F.R. Sec. 541.602
To meet the Salary Basis Test (as before):
- An employee must regularly receive a predetermined amount of compensation each pay period (on a weekly or less frequent basis)
- The compensation cannot be reduced because of variations in the quality or quantity of the work performed
- The employee must be paid the full salary for any week in which the employee performs any work
- However, the employee need not be paid for any workweek when no work is performed
Deductions From Salary - 29 C.F.R. Secs. 541.602, 541.603
Certain deductions continue to defeat the Salary Basis Test.
- An employee is not paid on a salary basis if deductions from the predetermined salary are made for absences occasioned by the employer or by the operating requirements of the businesses
- If the employee is ready, willing and able to work, deductions may not be made for time when work in not available
Some deductions are permitted
Seven exceptions to the "no pay-docking" rule:
- Absence from work for one or more full days for personal reasons, other than sickness or disability
- 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
- To offset any amounts received as payment for jury fees, witness fees, or military pay
- Penalties imposed in good faith for violating safety rules of "major significance"
- Unpaid disciplinary suspension of one or more full days imposed in good faith for violations of workplace conduct rules
- Proportionate part of an employee's full salary may be paid for time actually worked in the first and last weeks of employment
- Unpaid leave taken pursuant to the Family and Medical Leave Act
Improper Deductions
Examples of improper deductions include:
- Deduction for a partial-day absence to attend a parent-teacher conference
- Deduction of a day of pay because the employer was closed due to inclement weather or a Company holiday
- Deduction of three days of pay because the employee was absent from work for jury duty, rather than merely offsetting any amount received as payment for the jury duty
- Deduction for a two day absence due to a minor illness when the employer does not provide wage replacement benefits for such absences
Effect of Improper Deductions - 29 C.F.R. Sec. 541.603
Isolated or inadvertent improper deductions, however, will not result in the loss of exempt status if the employer reimburses the employee. However, an "actual practice" of making improper deductions from salary will result in the loss of the exemption:
- During the time period in which improper deductions were made
- For employees in the same job classifications
- Working for the same managers responsible for the actual improper deductions
"Actual Practice"
Factors that may suggest an actual practice of improper salary deductions include:
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- The number of improper deductions, particularly as compared to the number of employee infractions warranting discipline
- The time period during which the employer made improper deductions
- The number and geographic location of both the employees whose salaries were improperly reduced and the managers responsible
- Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions
Safe Harbor - 29 C.F.R. Sec. 541.603(d)
A "Safe Harbor" exists that will save an exemption even when improper deductions are made.
The exemption will not be lost if the employer:
- Has a "clearly communicated" policy prohibiting improper deductions, which includes a complaint mechanism;
- Reimburses employees for any improper deductions; and,
- Makes a good faith commitment to comply in the future.
This safe harbor is not available if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints.
Clearly Communicated Policy Defined
The best evidence of a clearly communicated policy is a written policy that is distributed to employees prior to the improper pay deductions by, for example:
- Providing a copy of the policy to employees at the time of hire
- Publishing the policy in an employee handbook
- Publishing the policy on the employer's Intranet
Payroll Practices That Do Not Violate the Salary Basis Test:
- Taking deductions from exempt employees accrued leave accounts
- Requiring exempt employees to keep track of and record their hours worked
- Requiring exempt employees to work a specified schedule
- Implementing bona fide, across-the-board schedule changes
Additional Compensation - 29 C.F.R. Sec. 541.604(a)
An employer may provide compensation in addition to the $455 minimum guaranteed weekly salary, such as:
- Commissions
- Bonuses
- Additional pay based on hours worked beyond the normal workweek
Hourly, Daily or Shift Basis - 29 C.F.R. Sec. 541.604.(b)
The regulations also allow an employee's earnings to be computed on an hourly, daily or shift basis, if the employer:
- Guarantees at least $455 per week paid on a salary basis, regardless of the number of hours, days of shifts worked; and,
- A "reasonable relationship" exists between the guaranteed amount and the amount actually earned for that work week.
Reasonable Relationship Defined
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- "Reasonable relationship" means the weekly guarantee is roughly equivalent to the employee's usual earnings at the assigned hourly, daily or shift rate for the employee's normal scheduled workweek.
- For example, an exempt employee may be paid on a shift basis provided he or she are guaranteed a certain number of shifts and total shift payments that are guaranteed to be no less than $455 per week.
Fee Basis - 29 C.F.R. Sec. 541.605
- Administrative and professional employees under limited circumstances, also may be paid on a "fee basis"
- An employee is paid on a "fee basis" if the employee is paid an agreed sum for completing a single job, regardless of the time required to complete the work
- Payment on a "fee basis" is not available for employees who perform a series of non-unique jobs repeated an indefinite number of times for which payment on an identical basis is made over and over again
- A fee payment meets the minimum salary level required for exemption only if, based on the time worked to complete the job, the fee is at a rate that would amount to at least $455 per week if the employee worked 40 hours
Example:
-
- An artist is paid $250 to paint a portrait that took 20 hours to complete, the equivalent of $12.50 per hour
- Because working 40 hours at this $12.50 per hour rate would yield the artist $500, the fee payment meets the salary requirements for exemption
- Employees who can be exempt even if not salaried:
- Outside Sales Employees
- Doctors
- Lawyers
- Teachers
- Certain computer-related occupations paid at least $27.63 per hour.
Duties Test
Executive Duties - Subpart B - 29 C.F.R. Sec. 541.100, et seq.
According to 29 C.F.R. Sec. 541.100, an employee will meet the duties test for the executive exemption if:
- His or her primary duty is management of the enterprise or of a customarily recognized department or subdivision;
- He or she customarily and regularly directs the work of two or more other employees; and
- He or she has the authority to hire or fire other employees or if he or she can make suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees are given particular weight.
Primary Duty Defined - An employee's primary duty is the principal, main, major or most important duty that the employee performs.
- Factors to consider when determining an employee's primary duty include, but are not limited to:
- Relative importance of the exempt duties;
- Amount of time spent performing exempt work;
- Relative freedom from direct supervision; and
- Relationship between the employee's salary and the wages paid to other employees for the same kind of nonexempt work.
Employees who spend more than 50% of their time performing exempt work will generally satisfy the primary duty requirement. However, the regulations do not require that exempt employees spend more than 50% of time performing exempt work.
Management Defined - 29 C.F.R. Sec. 541.102
Management duties that satisfy the test for executive employee.
- Interviewing, selecting, and training employees
- Setting and adjusting pay and work hours
- Maintaining production or sales records
- Appraising employee productivity and efficiency
- Handling employee complaints and grievances
- Disciplining employees
- Planning and apportioning work among employees
Department or Subdivision Defined - 29 C.F.R. Sec. 541.103
- A "customarily recognized department or subdivision" must have a permanent status and continuing function
- The department or subdivision need not be physically within the employer's establishment, and may move from place to place
- Continuity of the same subordinate personnel is not essential to the existence of a recognized unit
- The employee in charge of each branch establishment is in charge of a recognized subdivision
- Does not include a mere collection of employees assigned from time to time to a specific job
Customarily and Regularly Defined:
- A frequency that must be greater than occasional, but which, may be less than constant
- Includes work normally and recurrently performed every workweek
- Duties that are customarily and regularly performed do not include isolated or one-time tasks
Two or More Defined - 29 C.F.R. Sec. 541.104
- The phrase "two or more other employees" means two full-time employees or an equivalent number of hours of worked supervised
- Full-time generally means 40 hours per week
- Supervision of the same employees can be distributed among two or more exempt executives, but the hours worked by an employee cannot be credited more than once
Particular Weight Defined - 29 C.F.R. Sec. 541.105
When determining whether an employee's recommendations are given "particular weight," the factors to be considered include:
- Whether it is part of the employee's job duties to make suggestions and recommendations
- The frequency with which suggestions and recommendations are made or requested
- The frequency with which the employee's suggestions and recommendations are relied upon in decision-making
- Note: suggestions and recommendations may be reviewed by a higher level manager without failing this test
- The exempt executive need not have authority to make the ultimate decision
- Making an occasional suggestion regarding a change in status of a co-worker does not meet the "particular weight" standard
Concurrent Duties - 29 C.F.R. Sec. 541.106
- Concurrent performance of exempt and nonexempt work does not automatically disqualify an employee from exemption
- Exempt executives generally decide when to perform nonexempt duties and remain responsible for the success or failure of business operations
- Nonexempt employees generally are directed by a supervisor to perform the exempt work or perform the exempt work for defined time periods
20% Owner Executives
The executive exemption also includes employees who:
- own at least a bona fide 20-percent equity interest in the enterprise; and,
- are actively engaged in management of the enterprise.
The salary level and salary basis requirements do not apply to 20% equity owners.
Administrative Duties - Subpart C - 29 C.F.R. Sec. 541.200, et seq.
An employee will meet the duties test for the administrative exemption if the employee's:
- 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
- Primary duty includes the exercise of "discretion and independent judgment" with respect to matters of significance.
Management or General Business Operations Defined - 29 C.F.R. Sec. 541.201
- Refers to the type of work performed by the employee
- Work must be directly related to assisting the running or servicing of the business
- Exempt duties do not include working on a manufacturing production line or selling a product in a retail or service establishment
- Types of jobs the DOL has defined as typically administrative in nature, i.e., related to management or general business operations:
- Tax
- Finance
- Accounting
- Budgeting
- Auditing
- Insurance
- Quality Control
- Purchasing
- Procurement
- Advertising
- Marketing
- Research
- Safety and Health
- Human Resources
- Employee Benefits
- Labor Relations
- Public and Government Relations
- Legal and Regulatory Compliance
- Computer Network, Internet and Database Administration
- Employees acting as advisors or consultants to clients or customers
Discretion and Independent Judgment Defined - 29 C.F.R. Sec. 541.202
- The process of comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered
- Must be exercised with respect to "matters of significance," which refers to the level of importance or consequence of the work performed
Discretion and independent judgment may exist even if decisions and recommendations are reviewed at a higher level and, upon occasion, revised or reversed.
- Factors important to determining whether discretion and independent judgment exist include, but are not limited to:
- Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices
- Whether the employee carries out major assignments relating to operation of the business
- Whether the employee performs work that affects business operations to a substantial degree, even if the employee's assignments are related to operation of a particular segment of the business
- Whether the employee has authority to commit the employer in matters that have significant financial impact
- Whether the employee has authority to waive or deviate from established policies and procedures without prior approval
- Whether the employee has authority to negotiate and bind the company on significant matters
- Whether the employee provides consultation or expert advice to management
- Whether the employee is involved in planning long- or short-term business objectives
- Whether the employee investigates and resolves matters of significance on behalf of management
- Whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances
- Discretion and independent judgment does not include:
- Applying well-established techniques, procedures or specific standards described in manuals or other sources
- Clerical or secretarial work
- Recording or tabulating data
- Performing mechanical, repetitive, recurrent or routine work
- Use of Manuals
- An employee's use of manuals will not disprove the existence of discretion and independent judgment. Thus, exempt employees may use manuals, guidelines or other established procedures if they contain or relate to highly technical, scientific, legal, financial or other similarly complex matters that can be understood or interpreted only by those with advanced or specialized knowledge or skills.
- However, employees are not exempt if they use manuals to apply well-established techniques or procedures within narrowly prescribed limits.
Specific types of positions that may be exempt under the administrative exemption - 29 C.F.R. Sec. 541.203:
Insurance Claims Adjusters
- May be exempt if duties include:
- Interviewing insureds, witnesses and physicians
- Inspecting property damage
- Reviewing factual information to prepare damage estimates
- Evaluating and making recommendations regarding coverage of claims
- Determining liability and total value of a claim;
- Negotiating settlements
- Making recommendations regarding litigation
Financial Services
- May be exempt if duties include:
- Collecting and analyzing information regarding the customer's income, assets, investments or debts
- Determining which financial products best meet the customer's needs and financial circumstances
- Advising the customer regarding the advantages and disadvantages of different financial products
- Marketing, servicing or promoting the employer's financial products
- An employee whose primary duty is selling financial products does not qualify for the administrative exemption
Human Resources
- Human resource managers who formulate, interpret or implement employment policies generally meet the administrative duties requirements
- Personnel clerks who "screen" applicants to obtain data regarding minimum qualifications and fitness for employment generally are not exempt administrative employees
Other Exempt Positions
- An employee who leads a team of other employees assigned to complete major projects
- Executive assistant or administrative assistant to a business owner or senior executive of a large business who has been delegated authority regarding matters of significance
- Management consultants who study the operations of a business and propose changes in organization
Non-Exempt Positions
The DOL has commented that some positions will not be considered exempt:
- Inspectors performing ordinary inspection work involving well-established techniques and procedures
- Examiners and graders who perform work involving comparison of products with established standards
- Comparison shoppers who merely report the prices at a competitor's store
- Public sector inspectors on investigators
Professional Duties Test - Subpart D - 29 C.F.R. Sec. 541.300
Learned Professional - 29 C.F.R. Sec. 541.301
Learned and artistic professionals may be exempt under the professional exemption. The duties test for this exemption follows.
An employee is an exempt learned professional if:
- His or her primary duty is the performance of work requiring advanced knowledge
- In a field of science or learning
- Customarily acquired by a prolonged course of specialized intellectual instruction
Advanced Knowledge
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- Predominately intellectual in character
- Includes work requiring the consistent exercise of discretion and judgment
- The advanced knowledge is generally used to analyze, interpret or make deductions from varying facts or circumstances
- Not work involving routine mental, manual, mechanical, or physical work
- Must be obtained after the high school level
Field of Science or Learning
- Occupations with recognized professional status, as distinguished from the mechanical arts or skilled trades
Prolonged Course of Specialized Intellectual Instruction
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- Specialized academic training is a prerequisite for entering the profession
- Best evidence that an employee meets this requirement is possession of the
