Department of Labor Proposes Revisions to Fair Labor Standards Act Overtime
By John Scalia,
Mary Pivec, and Scott Johnson,
Greenberg Traurig, Tysons Corner Office
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For the first time in decades, the U.S. Department of Labor ("DOL") has
proposed significant changes to the regulations that govern the executive,
administrative, professional, outside sales, and computer professional exemptions
(often called the "white collar" exemptions) to the Fair Labor Standards
Act ("FLSA" or "the Act"). The overtime pay requirements of the FLSA require
that an employee be paid overtime at a rate of one and one-half times the
employee’s regular rate of pay for all hours worked over 40 in a given workweek.
However, the overtime requirements do not apply to employees who are "exempt"
from the Act. Primary categories of exempt employees include executive employees,
administrative employees, professional employees, outside sales employees,
and certain computer personnel. In order to fall within one of these exemptions,
generally three requirements must be met. First, the employee must be paid
a predetermined salary, rather than an hourly wage subject to reduction
based upon the quantity or quality of the employee’s work (the "salary basis"
test). Second, the employee must receive a certain minimum salary. Third,
the employee must primarily perform the types of duties defined by the regulations
(the "duties" test).
|"The U.S. Department of Labor
("DOL") has proposed significant changes to the regulations that
govern the executive, administrative, professional, outside sales,
and computer professional exemptions."
On March 31, 2003, the DOL issued proposed regulations that would modify
all three requirements of the white collar exemption test. The proposal
would increase the minimum salary necessary to fall within the exemption,
change some aspects of the salary basis test, and broaden the definition
of exempt duties, allowing more employees who meet the minimum salary requirements
to fall within an overtime exemption. A new exemption for highly compensated
employees also would be created. The proposed changes would modify some
areas of the present regulations that have been the subject of frequent
litigation, likely limiting further litigation of these issues. However,
there are also several provisions in the proposed regulations that would
probably spawn new areas of litigation. The DOL has invited public comment
on the proposed regulations and expects to issue final regulations in late
2003 or early 2004.
The DOL’s Proposed Increase of the Minimum Salary Requirements
One of the most significant proposed changes to the rules is the increase
in the minimum salary requirement. Executive, administrative, and professional
employees must receive a minimum salary level in order to be exempt. Under
the present regulations, that minimum level varies depending on the duties
test to be used. The so-called "long" test is applied if an employee earns
at least $155 per week (if considered for the executive or administrative
exemptions) or at least $170 per week (if considered for the professional
exemption). However, the "short" test is applied if an employee earns a
salary of over $250 per week. The short test generally provides for a more
lenient standard (making it more likely that an employee is exempt). These
minimum compensation levels have remained unchanged since 1975 and have
obviously not kept pace with inflation over the years. As a result, under
the present regulations, the minimum salary level is almost always easily
met, and an employee’s exempt status is largely decided by the duties he
or she performs rather than his or her salary level.
Under the proposed regulations, an across-the-board minimum weekly salary
of $425 per week would be necessary for the executive, administrative, and
professional exemptions, as well as the exemption for computer-related employees.
This would raise the annualized salary bar to $22,100. According to the
DOL, the proposed changes would guarantee overtime pay for 1.3 million more
low-wage employees who are presently classified as exempt employees.
Changes to the Salary Basis Test
The salary basis test generally requires that employees receive a salary,
which is a predetermined amount constituting all or part of the employee’s
compensation and which is not subject to reduction based on variations in
the quality or quantity of the work. The present scheme provides employers
only limited ability to make deductions from an exempt employee’s salary.
Deductions are allowed, for example, for absences of a day or more for personal
reasons or for sickness and disability if taken in accordance with a bona
fide plan, policy, or law providing wage replacement benefits. Also, employers
may make deductions for hours taken as unpaid FMLA leave.
The proposed regulations relax the requirements of the salary basis test.
For example, the new regulations allow an employer to dock an exempt employee
for a full-day’s pay for disciplinary reasons (the present regulations only
allow such deductions for violating major safety rules).
More important, the proposed regulations to some extent limit the effects
of improper pay docking. Under current rules, an employer can lose the exemption
for an entire class of employees by making an improper deduction, unless
the employer properly takes advantage of the "window of correction" and
rectifies any underpayment that may have occurred. The proposed regulations
indicate that the "window of correction" should be widely available to avoid
loss of the exemption to a whole category of employees – unless it can be
proved that there is a pattern and practice of improper deductions with
respect to the employees who are in the particular job category in question
and who are working for the same manager who was responsible for the improper
Similar to the judicial rule adopted by the Supreme Court in the landmark
Farraher case dealing with employer liability for co-worker sexual
harassment, the DOL has proposed a new "safe harbor" provision for employers
that adopt a written policy against improper deductions, notify employees
of that policy, and reimburse employees for improper deductions. These proposed
regulations may present tremendous opportunities for employers to limit
their exposure to overtime lawsuits, and the liquidated damages and attorney’s
fees typically implicated by such suits.
The DOL’s Proposed Changes to the Duties Test
The DOL is also proposing changes to the duties test for the various
white collar exemptions. The old framework of "long" and "short" tests would
be replaced with one test for each category of exemption. As a result, under
the proposed regulations, employers no longer would have to deal with the
cumbersome and impractical "80/20" test for measuring exempt and non-exempt
activities. Employers frequently could not prove compliance with the test
in hindsight, because they were not tracking the hours of workers they presumed
to be exempt in the first place. The employee challenging his or her exempt
classification typically had the upper hand in any administrative or judicial
contest, providing self-serving, but difficult-to-challenge, testimony regarding
his or her actual job duties.
The following describes the proposed changes to each of the exempt white
Under the proposed regulations, the duties test would require that an
exempt executive employee must:
(1) Have a primary duty of managing the enterprise in which the employee
is employed or of a customarily recognized department or subdivision thereof;
(2) Customarily and regularly direct the work of two or more other employees;
(3) Have the authority to hire or fire other employees or have particular
weight given to suggestions and recommendations as to the hiring, firing,
advancement, promotion, or any other change of status of other employees.
68 Fed. Reg. 15560, 15564 (March 31, 2003).
This test is essentially a combination of the short test under the current
regulations plus one of the long test’s requirements – that the employee
have authority to hire or fire. The proposed regulations also clarify that
managers in retail establishments would be deemed exempt even if they spend
the majority of their time in any one work week in non-exempt duties, provided
their primary duty includes scheduling employees, assigning work, overseeing
product handling, ordering merchandise, managing inventory, handling customer
complaints, authorizing bill payment or performing similar management functions.
In industries where managers frequently lend a helping-hand during peak
service periods, such as restaurants, hotels, and entertainment venues,
this clarification would go far to preserve the executive exemption in the
face of legal challenges.
The proposed regulations also provide executive employee exemptions for
site managers and owners. An employee who is in "sole charge" of "an independent
establishment or a physically separated branch establishment" may qualify
as an exempt executive if paid the minimum salary, regardless of whether
he or she meets the other requirements of the exemption. In addition, any
employee who "owns at least a 20 percent equity interest in the enterprise
in which the employee is employed" would be an exempt executive, regardless
of his or her salary level or job duties.
The administrative exemption is one of the most difficult to apply of
the white collar exemptions. For example, substantial litigation has resulted
from the requirement that administrative employees exercise "discretion
and independent judgment." In particular, litigation has occurred when the
subject employees are required to follow written corporate instructions
in carrying out their duties. Insurance claims adjusters and mortgage loan
officers are just two of the occupational categories that have spawned costly
class action litigation. The proposed regulations would remove the need
to prove the consistent exercise of judgment and discretion – eliminating
the dilemma of having to abandon either the overtime exemption or consistency
in the adjudication policies. Moreover, the DOL has declared that the number
of employees performing the task is irrelevant to the determination of exempt
The new test requires that an administrative employee:
(1) Have the primary duty of performing "office or non-manual work related
to the management or general business operations of the employer or the
employer’s customers;" and
(2) Hold a "position of responsibility" with the employer, defined as
either: (a) performing work of "substantial importance;" or (b) performing
work requiring a "high level of skill or training."
68 Fed. Reg. at 15587.
The proposed rules provide illustrative examples of "work related to
the management or general business operations," including "tax, finance,
accounting, auditing, insurance, quality control, purchasing, procurement,
advertising, marketing, research, safety and health, personnel management,
human resources, employee benefits, labor relations, public relations, government
relations, and similar activities." 68 Fed. Reg. at 15587. According to
the DOL, the proposed regulations also would reduce the emphasis on the
outdated "administrative versus production" dichotomy, which has often been
the subject of litigation, while still requiring an exempt administrative
employee to be engaged in work related to the management or general business
operations of the employer or the employer’s customers. 68 Fed. Reg. at
Of particular note in the proposed regulations is the assurance that
employees who work as consultants and provide management services to third
parties on behalf of their employers may be properly classifiable as administratively
exempt. Further, the "high level of skill or training" alternative component
of the second prong of the administrative exemption does not require college
training – simply specialized knowledge or abilities, and not necessarily
of an advanced nature. Stock brokers, broker assistants, actuarial assistants,
and advertising consultants are among the classes of employees that may
now qualify for exempt status under the proposed regulations.
The current regulations pertaining to professional employees provide
separate tests for various types of professional employees, including "learned"
and "creative" or "artistic" professionals and computer professionals. The
proposed regulations modify these tests somewhat, particularly the learned
professional exemption, move the computer professional exemption to a separate
category, and eliminate the long test.
For learned professionals, the proposed requirements provide that employees
would qualify for the exemption if they "have a primary duty of performing
office or non-manual work requiring advanced knowledge in a field of science
or learning which is customarily acquired by a prolonged course of specialized
intellectual instruction, but which also may be acquired by an equivalent
combination of intellectual instruction and work experience." 68 Fed. Reg.
at 15567. The new test would recognize that some employees gain their expertise
on the job, rather than through a particular course of academic study, and
would relax the need for an employee to have a particular academic degree.
Thus, as noted by the proposed rule, the test would "focus on the knowledge
of the employee and how that knowledge is used in everyday work, not on
the educational path followed to obtain that knowledge." 68 Fed. Reg. at
15567. The proposed test for learned professionals eliminates the requirement
that learned professionals exercise independent judgment and discretion,
but adds the requirement that the work involve office or non-manual work.
The proposed regulations make minor changes to the wording of the test
for creative professionals, but, according to the DOL, these modifications
are not intended to make any material changes from the existing regulations.
68 Fed. Reg. at 15568. The artistic professional exemption would apply to
any employee with the primary duty of "performing office or non-manual work
requiring invention, imagination, originality or talent in a recognized
field of artistic or creative endeavor." 68 Fed. Reg. at 15589. However,
the DOL clarifies that certain occupational categories in the news and entertainment
industry are properly classifiable as exempt – hopefully bringing an end
to numerous class and individual overtime lawsuits involving employees who
allegedly have not been able to exercise the degree of independence believed
necessary to avoid overtime entitlement.
Professional employees may be paid on a salary or fees basis at the new
$425 per week rate.
The proposed regulations regarding computer professionals would streamline
the present regulations and would, as with the other exemptions, remove
the requirement of "discretion and judgment." In addition, the regulations
would no longer cite specific job titles as examples of exempt work because,
as the proposed regulations note, the job titles for this category of employee
tend to become quickly outdated due to the rapidly changing nature of the
information technology industry. 68 Fed. Reg. at 15569. Otherwise, the regulations
would not substantively change the present requirements. The proposed regulations
would exempt employees who are compensated on an hourly basis of at least
$27.63 (the current hourly rate) or on a salary or fee basis of $425 per
In order to meet the duties test, computer systems analysts, computer
programmers, software engineers, and "other similarly skilled employees"
in the computer field must have the primary duty consisting of:
(1) "The application of systems analysis techniques and procedures, including
consulting with users, to determine hardware, software or system functional
(2) "The design, development, documentation, analysis, creation, testing
or modification of computer systems or programs, including prototypes, based
on and related to user or system design specifications;"
(3) "The design, documentation, testing, creation or modification of
computer programs related to machine operating systems;" or
(4) "A combination of the aforementioned duties, the performance of which
requires the same level of skills."
68 Fed. Reg. at 15590.
Outside Sales Employees
The DOL proposed rules are intended to simplify the outside sales exemption,
in part by removing the 20 percent limit on nonexempt work performed by
outside sales employees. The "essential elements" of the duties test would
remain basically the same. To meet the outside sales exemption, an employee
(1) Have a primary duty of "making sales" or "obtaining orders or contracts
for services or for the use of facilities;" and
(2) Be "customarily and regularly engaged away from the employer’s place
or places of business in performing such primary duty."
68 Fed. Reg. at 15591. The minimum salary requirement does not apply
to outside sales employees.
Highly Compensated Employees
The proposed regulations contain a new exemption for highly compensated
employees. Under this test, an employee who is paid $65,000 or more annually,
performs non-manual work, and performs at least one of the executive, administrative,
or professional functions would be exempt. The proposed rule does not require
that such employee be paid on a salary basis, but rather allows consideration
of base salary, commissions, non-discretionary bonuses, and other non-discretionary
compensation, so long as the base salary, commissions, and non-discretionary
compensation are settled and paid out on at least a monthly basis. An employee
who works for only part of a year may be eligible for the exemption so long
as the employee is guaranteed a pro rata portion of the $65,000 annual salary
based upon the number of weeks the employee is in the position. This new
safe harbor may prove tremendously valuable to employers who wish to continue
compensating employees on an hourly basis – particularly where the availability
of work is linked to client contracts (such as nursing agencies, computer
consulting firms, and engineering consulting firms).
If the regulations are promulgated as proposed, the impact on the workplace
will be significant. According to the DOL’s estimates, based on the changes
which would be made in the white collar duties tests, employers should be
able to reclassify between 1.5 to 2.7 million salaried workers as overtime
exempt. The DOL further estimates that, based on those same rule changes,
up to 644,000 current hourly workers will be converted to salaried exempt
employees. These estimates exclude consideration of more protective state
and local wage and hour laws that may continue to trump the liberalized
federal rules, particularly in those states with wage and hour laws more
restrictive than the federal scheme. They also exclude the effect of existing
collective bargaining agreements, which may continue to bind employers to
higher overtime payments.
There is a 90-day public comment period on the proposed regulations.
The DOL has invited comment upon a wide variety of issues raised by the
proposed regulations and expects to issue final regulations in late 2003
or early 2004. In the meantime, given this delay in the final promulgation
of the new regulations, and in light of the recent explosion in the number
and size of wage and hour cases being brought by employees, employers are
well-advised to perform a FLSA white collar exemption audit to assess their
compliance with, and limit their potential liability under, the current
If you or your organization would like to comment on these proposed regulations
or would like more information on compliance with the present regulations,
please contact John Scalia
at (703) 749-1380, email@example.com;
Craig Etter at (703) 749-1315, firstname.lastname@example.org;
Mary Pivec at (202) 452-4883, email@example.com. Additional information regarding
the FLSA exemptions is available at the DOL’s website,
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