DOL Publishes Major Changes to "White Collar" Overtime Rules
May 18, 2004
The much anticipated and highly controversial final regulations under the Fair Labor Standards Act (FLSA) implementing the exemptions from minimum wage and overtime pay for executive, administrative, professional, outside sales and computer employees were published in the Federal Register on April 23, 2004. The final regulations, promulgated by the U.S. Department of Labor (DOL), mark the most significant changes to the overtime pay regulations for the so-called “white collar” exemptions since the enactment of the FLSA in 1938. Indeed, the regulations have seen little updating in over 30 years, and portions were grossly out of date. For example, some of the minimum salary levels were below the minimum wage.
It’s important to note that the Senate voted on May 4, 2004, to block implementation of these new rules; however, the Senate action does not necessarily mean that the new rules will not go into effect.
Background
The FLSA generally requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked in excess of 40 hours in a workweek. However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Sections 13(a)(1) and 13(a)(17) also exempt certain computer employees.
Major Substantive Changes
The new Part 541 regulations make significant changes in a number of major areas, including the minimum salary level required for exemption and the duties test. They also include a number of new provisions, including one exempting certain equity holders of businesses, and another creating an exemption for “highly compensated” employees. Another significant new provision allows employers to take deductions from an exempt employee’s salary for absences due to disciplinary reasons such as sexual harassment or workplace violence. These and other changes are discussed below.
Salary Level
The minimum salary level for overtime exempt status increases to a standard of $455 a week for administrative and executive employees. This raises the salary threshold below which employees are generally guaranteed overtime to $23,660, up from the $8,060 minimum under current rules. The same $455 salary level is applied to “learned professional employees” and “creative professional employees.” The salary level for computer programming employees is unchanged.
Duties Test
The new regulations focus on a “primary duty” test rather than the outdated and confusing “duties test.” The new “primary duty” tests are as follows:
Executive. The test has three requirements: (1) the employee’s primary duty must be managing the enterprise, or managing a department or subdivision of the enterprise; (2) the employee must direct the work of at least two or more other full-time employees or their equivalent; and (3) the employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.The final rule contains factors to determine whether the employee’s decisions are given “particular weight”: “whether it is part of the employee’s job duties to make such suggestions and recommendations; the frequency with which such suggestions and recommendations are made or requested; and the frequency with which the employee’s suggestions and recommendations are relied upon.…”
Administrative. The current test has not been significantly revised. The two requirements under the new test are: (1) the employee’s primary duty must be 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.
Professional. The current test has not been significantly revised. The three requirements are: (1) the employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and that includes work requiring the consistent exercise of discretion and judgment; (2) the advanced knowledge must be in a field of science or learning; and (3) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Outside Sales: To qualify for the outside sales employee exemption, the following tests must be met: (1) the employee’s primary duty must be making sales, or obtaining orders or contracts for services or for the use of facilities for which a 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. There are no minimum salary requirements for the outside sales exemption.
Computer Programming Employee. The current test has not been significantly revised. To qualify for the computer programming employee exemption, the following tests must be met: (1) the employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below; (2) the employee’s primary duty must consist of (a) application of systems analysis techniques and procedures, or (b) design, development, documentation, analysis, creation, testing or modification of computer systems or programs, or (c) design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (d) a combination of the duties described in (a), (b) and (c), the performance of which requires the same level of skills.
Exemption for Business Owners
Under a special rule for business owners, an employee who owns at least a bona fide 20-percent equity interest in the enterprise in which employed, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is actively engaged in its management, is considered a bona fide exempt executive.
Highly Compensated Employees
The regulations create a new exemption for employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) if they regularly perform at least one of the duties of an exempt executive, administrative or professional employee. The required total annual compensation may consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period, but does not include credit for board or lodging, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits.
The exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy (i.e. non-management employees in production, maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers). Blue collar workers remain entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt under the Part 541 regulations no matter how highly paid they might be.
Salary Deductions for Full-Day Absences Relating to Disciplinary Action
The final rule includes a new provision allowing employers to take salary deductions for “unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules” (i.e. violations of policies prohibiting sexual harassment and workplace violence) without losing the employee’s exempt status. Prior to the new regulations, an employee’s exemption could be in jeopardy if the employer took a deduction for anything but the most serious of infractions, such as the violation of a major workplace safety policy.
Clarified “Window of Correction”
The new rule maintains a “window of correction” so that an employer does not lose the FLSA exemption because of isolated inadvertent incidents of improper pay deductions. Under the new rule, the exemption is lost only if there is an actual practice of making improper deductions, and even then, only for employees in the same job classification and working for the same manager who is responsible for the improper pay docking decision or policy.
The final rule also creates a new “safe harbor” provision that goes with the “window of corrections” policy. The safe harbor provision provides that if an employer has a clearly communicated policy that prohibits improper pay deductions and includes a complaint mechanism, reimburses employees for any improper deductions and makes a good-faith commitment to comply in the future, such employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. The best evidence of a clearly communicated policy, according to the regulation, is a written policy that is distributed to employees prior to the improper pay deductions.
Conclusion
Presuming there is no court or legislative challenge blocking their implementation, employers have until August 23, 2004, the effective date of the new regulations, to bring their companies into compliance with the law. Employers should take this opportunity to educate themselves on the new regulations and conduct workforce assessments to ensure that their employees are properly classified under the new rules. Suits alleging violations of wage and hour laws are the fastest growing segment of employment law litigation, and employment law litigation is the fastest growing segment of the federal court docket. Employers who fail to quickly bring themselves up to speed on the new regulations face serious and potentially costly risks of employee lawsuits and audits by the DOL’s Wage and Hour Division.
Employers should also recognize that the new finalized regulations differ significantly from the regulations that had initially been proposed a year ago. The DOL received thousands of comments and the regulations faced stiff opposition in Congress, especially from Senate Democrats. In an effort to stave off that opposition, the finalized regulations were “softened” (i.e. made more employee friendly) in a number of significant ways. First, the minimum salary necessary to qualify for the executive, administrative, and professional exemption was raised from $425 a week ($22,100 a year) to $455 a week ($23,600 a year). Second, and perhaps most importantly, the regulations that had been proposed a year ago eliminated the administrative exemption requirement of exercising “discretion and independent judgment,” replacing that with holding a “position of responsibility.” The new finalized regulations changed that back, keeping the old “discretion and independent judgment” requirement that had caused so much confusion for employers and led to a majority of the FLSA litigation. Third, although the new finalized regulations have kept the “highly compensated employee” exemption that had been proposed a year ago, the minimum qualifying salary was changed from $65,000 to $100,000. Fourth, there are other concessions made to other types of employees, mostly in the public sector, regarding the professional exemption (e.g. training for police officers and firefighters will not qualify them for the professional exemption).
Holland & Knight will be conducting a series of free online seminars on the new regulations, at which a more comprehensive analysis of the regulations and practical guidance on compliance will be provided. Access the events section of Holland & Knight’s Web site for dates and times.
For more information, email Todd Steenson at
todd.steenson@hklaw.com or call toll free, 1-888-688-8500.