GT Alert

U.S. Department of Labor Revisions to the Fair Labor Standards Act’s White Collar Employee Exemptions to Overtime Pay Requirements Take Effect

August 2004
By John Scalia, Michael Buddendeck and Richard Scharlat, Greenberg Traurig

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On August 23, 2004, the regulations released by the U.S. Department of Labor (“DOL”) revising the white collar exemptions to the overtime pay requirements of the Fair Labor Standards Act (“FLSA”) went into effect. The new regulations vary considerably from what the DOL proposed in March 2003 and 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.

"The new regulations vary considerably from what the DOL proposed in March 2003 and change significantly the long-standing system for classifying employees as exempt or non-exempt for purposes of overtime pay under the FLSA."

This GT Alert describes those revisions in the overtime exemptions that are of particular significance to private and public employers.

State Law vs. Federal Law

Complicating the application of the new federal regulations is the law of eighteen states that may trump the new federal overtime standard. Employers in Alaska, Arkansas, California, Colorado, Connecticut, Hawaii, Illinois, Kentucky, Maryland, Minnesota, Montana, New Jersey, North Dakota, Oregon, Pennsylvania, Washington, West Virginia and Wisconsin will be required to compare their state laws with the new federal standard to determine which overtime laws provide the most protection to the employee seeking overtime. The body of law that provides the most overtime protection for a particular employee will govern. This tension between state and federal law may even create the circumstance where one employer determines overtime compensation for different employees according to different laws, depending on their classification as executive employees, administrative employees, professional employees, computer employees, or outside sales employees.

Increase to the Minimum Salary Requirements

One of the most significant changes to the regulations 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 of 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 permit employers to deduct wages from the salary of an exempt employee who misses one or more full days of work due to violation of written 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 or more full days 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 Exemptions

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 collar categories.

Executive Employees

Under the new regulations, 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 employees, 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.

Under the new regulations, the executive employee exemption is very similar to what the DOL proposed in March 2003, but 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” executives.

Administrative Employees

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 new regulations do not include the “position of responsibility” requirement contained in the proposed regulations, which management and union representatives alike had criticized as too vague. Also, unlike the old regulations, the new regulations add 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 new regulations, 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 compliance.

The new regulations include illustrations of the administrative duties test to particular occupations. The regulations state 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 new regulations provide 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.

Professional Employees

The new regulations provide 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 new regulations do away with the proposal in the 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 new regulations.

The new regulations also incorporate 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 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.

Computer Employees

To qualify for the computer employee exemption under the new regulations, 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 new regulations recognize 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 new regulations follow 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 new regulations 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 new regulations, like the old regulations, the minimum salary requirements expressly do not apply to the outside sales exemption.

“Primary Duty” Defined

The new regulations define 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 new regulations also make 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 new regulations observe 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 new regulations, an exemption is presumed for an employee 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 was $65,000 per year.

The new regulations make 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.

Moving Forward

The DOL expects that the new regulations 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 regulations, employers should:

1. review and, where necessary, revise policies and position descriptions relating to exempt personnel to reflect the requirements of the new regulations;
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;
3. ensure that employees who were previously exempt remain so under the new regulations;
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 regulations to employees; and
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, which can be accessed at www.dol.gov/fairpay. 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

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