U.S. Department of Labor Releases Its Highly Anticipated Revisions to
the Fair Labor Standards Act’s White Collar Employee Exemptions to Overtime
By Mary Pivec, John Scalia
and Michael Buddendeck,
View or download the PDF version of this Alert
On April 20, 2004, the U.S. Department of Labor (“DOL”) released its
highly anticipated final rule revising the white collar exemptions to the
overtime pay requirements of the Fair Labor Standards Act (“FLSA”). The
new regulations vary considerably from what the DOL had proposed in March
2003. In the absence of any blocking litigation or legislation, the new
regulations take effect August 23, 2004 and will change significantly the
long-standing system for classifying employees as exempt or non-exempt for
purposes of overtime pay under the FLSA. For example, the new regulations:
(1) increase the minimum salary requirement from $155 per week to $455 per
week; (2) relax somewhat the requirements of paying exempt employees on
a “salary basis;” (3) create a “safe harbor” for employers who make improper
deductions from an exempt employee’s salary; (4) change the “duties test”
for white collar employees earning between $23,660 and $99,000 per year;
and (5) create a streamlined test for exempting highly compensated employees
earning $100,000 or more per year. This GT Alert describes those revisions
in the overtime exemptions that will be of particular significance to private
and public employers.
Increase to the Minimum Salary Requirements
|"In the absence of any blocking
litigation or legislation, the new regulations take effect August
23, 2004 and will change significantly the long-standing system
for classifying employees as exempt or non-exempt for purposes of
overtime pay under the FLSA."
One of the most significant changes to the rules is the increase in the
minimum salary requirement. Under the new regulations, in order for executive,
administrative, and professional employees to be exempt, they must meet
an across-the-board minimum salary threshold of $455 per week. This per
week increase raises the annualized minimum salary threshold to $23,660.
As a result, workers making less than the minimum salary requirements are
guaranteed overtime protection.
Under the prior regulations, the minimum per week salary threshold varied
based upon employee category: $155 per week for executive or administrative
employees, and $170 per week for professional employees.
The minimum salary increase is even greater than what the DOL had proposed
in March 2003. Under the proposed regulations, the DOL sought to increase
the minimum salary requirement to $425 per week and $22,100 per year.
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 or the employee’s
compensation and which is not subject to variations depending on the employee’s
quality or quantity of work. Subject to certain exceptions, an exempt employee
must receive his or her full salary for any week in which he or she performs
any work, regardless of the number of hours or days worked.
The new regulations relax the requirements of the salary basis test by
expanding the exceptions to the “no pay docking” rule. For example, the
new regulations now permit employers to deduct wages from the salary of
an exempt employee who misses one day or more of work due to violation of
workplace conduct or disciplinary rules. In addition, employers may dock
the pay of an exempt employee when the employee is absent from work for
one day or more for personal reasons other than sickness or disability.
Employers also may dock an exempt employee’s pay in order to offset amounts
received as jury or witness fees or for military pay, and for penalties
imposed for violation of major safety rules.
Under the new regulations, an employer will lose the exemption if it
has an “actual practice” of making improper deductions from the salaries
of exempt employees. Isolated or inadvertent instances of improper deductions
will not result in the loss of the exemption if the employer reimburses
the employee for the deductions. In addition, under the new regulations,
a “safe harbor” may exist to save an exemption even where improper deductions
were made. To qualify for the “safe harbor,” the employer must have a clearly
communicated policy prohibiting improper deductions and including a complaint
mechanism, reimburse employees for any improper deductions, and make a good
faith commitment to comply in the future.
Addition of Express Limitations on the Availability of the White Collar
The new regulations also contain introductory provisions rendering the
white collar exemptions inapplicable to police officers, detectives, deputy
sheriffs, state troopers, highway patrol officers, investigators, inspectors,
correctional officers, parole or probation officers, park rangers, fire
fighters, rescue workers, hazardous materials workers and similar employees,
regardless of rank or pay level, who perform work such as preventing, controlling
or extinguishing fires of any type; rescuing fire, crime or accident victims;
preventing or detecting crimes; performing surveillance; pursuing, restraining
and apprehending suspects; detaining or supervising suspected and convicted
criminals, including those on probation or parole; interviewing witnesses;
interrogating and fingerprinting suspects; preparing investigative reports;
or other similar work. The foregoing public safety worker exclusions are
not contained in the DOL Notice of Proposed Rulemaking, and many government
employers will face unanticipated budgetary pressures and compliance costs
as a result.
Changes to the Exempt Duties Tests
The new regulations change the duties test for various white collar exemptions.
The following describes the new requirements for each of the exempt white
Under the new regulation, an employee must meet the following criteria
to qualify for the executive exemption: (1) the employee’s primary duty
must be managing the enterprise or managing a customarily recognized subdivision
or department of the enterprise; (2) the employee must customarily and regularly
direct the work of at least two or more full-time employee, or their equivalent;
and (3) the employee must have the authority to hire or fire other employees,
or his or her recommendations for status changes to other employees, including
hiring, firing, and advancement, must be given particular weight.
Although the final rule regarding the executive employee exemption is
very similar to what the DOL proposed in March 2003, it adds that business
owners with at least 20% equity interest in the enterprise also must be
actively engaged in management of the enterprise to qualify for the exemption.
In addition, the new regulations remove the special rules for “sole charge”
Under the new regulations, the administrative employee exemption will
apply if: (1) 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 (2) the employee’s primary
duty includes the exercise of discretion and independent judgment with respect
to matters of significance.
The final rule deletes the “position of responsibility” requirement in
the proposed regulations, which management and union representatives alike
had criticized as too vague. Also, unlike the old regulations, the final
rule adds that the employee’s exercise of discretion and independent judgment
must be with respect to “matters of significance,” which refers to the level
of importance or consequence of the work performed. Under the final rule,
work that is “directly related to management or general business operations”
includes work in areas of tax, finance, accounting, budgeting, auditing,
insurance, purchasing, procurement, advertising, marketing, research, safety
and health, quality control, personnel management, human resources, employee
benefits, labor relations, public relations, government relations, computer
network, Internet and database administration, and legal and regulatory
The new regulations include illustrations of the administrative duties
test to particular occupations. The final rule states that insurance adjusters
generally meet the duties requirements for the administrative exemption,
provided their duties include work such as 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; and making recommendations regarding litigation. Additionally,
the final rule provides that employees in the financial services industry
generally meet the administrative duties test if their work includes collecting
and analyzing information regarding customer income, assets, investments
or debts; determining which financial products best meet customer needs
and circumstances; advising customers regarding varied financial products;
and marketing, servicing or promoting the employer’s financial products
– but not if the employee’s primary duty is inside sales of financial products.
The final regulation provides that a professional employee is exempt
if: (1) the employee’s 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 the consistent exercise of
discretion and judgment) in a field of science or learning customarily acquired
by a prolonged course of specialized intellectual instruction; or (2) the
employee’s primary duty is the performance of work requiring invention,
imagination, originality or talent in a recognized field of artistic or
creative endeavor. Among the types of employees noted as exempt are lawyers,
doctors, architects, engineers, teachers, actors, writers and musicians.
The final rule does away with the proposal in the DOL’s proposed regulations
to include employees who acquired their advanced knowledge by alternative
means, such as a combination of intellectual instruction and work experience.
References to training received in the military or at a technical school,
which had been included in the proposed regulations, are also removed from
the final rule.
The final rule also incorporates existing interpretative guidance holding
registered nurses to be learned professionals, and adds physician assistants
who have graduated from an accredited program, executive chefs and sous
chefs with a specialized 4-year specialized academic degree in culinary
arts, and certified athletic trainers. The DOL declined to accord professional
status to pilots, funeral directors and paralegals, absent proof of uniform
state licensure requirements requiring an advanced 4-year degree.
To qualify for the computer employee exemption under the final rule,
the following test must be met: (1) the employee must be compensated either
on a salary or fee basis at a rate not less than $455 per week, or on an
hourly basis of not less than $27.63 per hours; (2) the employee must be
employed as a computer systems analyst, computer programmer, software engineer,
or other similarly skilled worker in the computer field; and (3) the employee’s
primary duties must consist of: (a) application of systems analysis techniques
and procedures, (b) design, development, documentation, analysis, creation,
testing or modification of computer systems or programs, (c) the design,
documentation, testing, creation or modification of computer programs related
to machine operating systems, or (4) a combination of the duties described
above. The computer employee exemption does not include employees engaged
in computer manufacture and repair.
The final rule recognizes that computer employees who are not paid in
accordance with the special salary rule approved by Congress may nevertheless
be deemed exempt from overtime if they qualify under one or more of the
executive, administrative or professional exemptions.
Outside Sales Employees
The final rule follows the DOL’s proposed regulations in removing the
requirement that not more than 20% of the outside sales employee’s time
be spent performing nonexempt work. Under the final rule the following test
must be met in order to qualify for the outside sales exemption: (1) the
employee’s primary duty must be making sales (as defined in the FLSA), or
obtaining orders or contracts for services or for the use of facilities
for which consideration will be paid by the client or customer; and (2)
the employee must be customarily and regularly engaged away from the employer’s
place of business. Under the final rule, like the old regulations, the minimum
salary requirements expressly do not apply to the outside sales exemption.
“Primary Duty” Defined
The final rule defines the term “primary duty” to mean the principal,
main, major or most important duty that the employee performs, based on
all the facts in a particular case, with the major emphasis on the character
of the employee’s job as a whole. Although the final rule also makes clear
that there is no strict percentage limitation on the performance of nonexempt
work, and that an otherwise exempt supervisory employee does not lose the
exemption because the employee is simultaneously performing exempt and nonexempt
work, nevertheless the amount of time spent performing exempt work can be
a useful guide in determining whether exempt work is the primary duty of
an employee. Employees who spend more than 50 percent of their time performing
exempt work, such as supervising and directing the work of other employees,
ordering merchandise, managing the budget and authorizing payment of bills,
will generally satisfy the primary duty test. The final rule observes that
if an assistant manager in a retail establishment is closely supervised
earns little more than nonexempt employees, such a manager generally would
not satisfy the primary duty requirement.
Highly Compensated Employees
Under the final rule, an exemption is presumed for a employees with total
compensation of at least $100,000 per year (including commissions and non-discretionary
bonuses), provided that the employee performs office or non-manual work,
and customarily and regularly perform any one or more of the exempt duties
or responsibilities of an executive, administrative, or professional employee.
Under the proposed rule, the salary threshold for the highly compensated
employee exemption had been $65,000 per year.
The final rule makes clear that public safety employees, regardless of
grade or rank, may not be excluded from overtime pay even if they earn in
excess of $100,000 annually.
The DOL expects that the final rule ultimately will save businesses over
$250 million per year – although implementation costs in the first year
may exceed savings. As noted above, public employers may find they are liable
for increased overtime costs due to the declassification of high ranking
public safety personnel and other law enforcement professionals from the
pool of FLSA-exempt employees.
In order to maximize potential savings and ensure compliance with the
new rule, employers should:
(1) review and, where necessary, revise policies and positions descriptions
relating to exempt personnel to reflect the requirements of the new rule;
(2) review all positions and identify those that fall below the new
minimum salary requirement of $23,660 per year and implement any necessary
adjustments on the new regulations’ August 23, 2004 effective date;
(3) ensure that employees who were previously exempt remain so under
the new rule;
(4) review other employee positions to determine if previously non-exempt
employees are now properly classified as exempt;
(5) communicate all changes necessitated by the new rule to employees;
(6) adopt a policy statement providing a complaint and investigation
procedure to ensure full advantage of the new safe harbor for violations
of the salary rule. (The GT Labor and Employment Group has developed a
model wage compliance policy that will be made available to clients of
the firm upon request.)
The information in this GT Alert is drawn in part from the
DOL’s FairPay Web site. For more specific questions regarding how the
new overtime regulations will impact your business, contact any of the attorneys
in Greenberg Traurig’s Labor & Employment Practice Group.
© 2004 Greenberg Traurig
For more information, please review our Employment Law Practice description,
or feel free to contact one of our attorneys.
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.