Highlights of the DOL's Revised Overtime Regulations

On April 22, 2004, the Department of Labor (DOL) issued revised regulations implementing the white collar exemptions to the Fair Labor Standards Act's (FLSA) overtime and minimum wage requirements. The new rule marks the first time the duties tests have been revised since 1949; the salary test has not been revised since the 1970's.  The final rule was issued after the DOL published a proposed revised regulation in March 2003.  The agency reviewed over 75,000 comments on the proposed revision before issuing the final rule.  The revision of the white collar exemptions has been the subject of much political controversy and there is still talk of political efforts to block the final regulation, which becomes effective August 23, 2004.

This Alert discusses some of the highlights of the final rule, including some ways in which the rule differs from the prior rule and the proposed revision.  The final rule specifically states that the exemptions do not apply to "blue-collar" workers, licensed practical nurses, and first responders (such as firefighters and police officers).  It also streamlines the duties tests for the administrative, executive, professional, outside sales, and computer employee exemptions and modifies the salary test.

The DOL has released a "Fair Pay Initiative" that includes information for employers and employees on how the rule governs overtime exemptions.  The initiative includes a web site with online seminars explaining parts of the revised regulation. The web site can be accessed at: http://www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm.

The DOL also issued fact sheets that explain the new tests for the various categories of the exemption.  These fact sheets are available from the DOL's web site.

Salary Requirement

Amount 

Generally, the final rule raised the minimum salary threshold for exemptions to $455 per week ($23,660 per year).  This is an increase from $155 per week for the executive and administrative exemptions and $170 per week for the professional exemption under the prior rule.  It is also an increase from the proposed rule's minimum of $425 per week.

Employees who are not paid on a salary or fee basis of at least $455 per week or $23,660 per year are not exempt from the FLSA's minimum wage and overtime requirements regardless of their duties.  Employees who are paid at least this much are exempt only if they also meet the salary basis and job duties tests. 

The salary requirement applies to administrative, executive, and professional employees.  Under the final rule, as under the proposed rule and the prior rule, there is no minimum salary requirement for outside sales employees and some professional employees such as teachers, doctors, and lawyers.  Additionally, computer employees exempt under §13(a)(1) of the FLSA must be compensated on a salary or fee basis of not less than $455 per week; those exempt under §13(a)(17) of the FLSA must be compensated on an hourly basis at a rate not less than $27.63 per hour.  This is consistent with the prior rule, except that the minimum weekly salary amount has increased.    

Highly Compensated Employees

The highly compensated test in the final rule applies only to employees who earn at least $100,000 per year and who receive at least $455 per week on a salary basis.  This is an increase over the amount of $65,000 per year in the proposed rule.  The final rule also requires that exempt highly compensated employees must customarily and regularly perform work that satisfies one or more of the elements of the duties test for an executive, administrative, or professional employee.  The highly compensated exemption applies only to employees performing office or non-manual work.  

Salary Basis

To be paid on a salary basis, an employee must regularly received a predetermined amount of salary on a weekly or less frequent basis that is not subject to reduction because of variations in the quantity or quality of work performed.  The final rule, like the proposed revision, retains the prior rule's general standards for determining when an employee is paid on a salary basis. 

New Permissible Deduction - The final rule incorporates many of the exceptions to the salary basis that were permitted under the prior rule and adds another permissible deduction.  Under the final rule, an employer may deduct an exempt employee's salary for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules.  These suspensions must be imposed pursuant to a written policy applicable to all employees.   In the preamble to the final rule, the DOL describes this change as "a common-sense change that will permit employers to hold exempt employees to the same standards of conduct as that required of their non-exempt workforce."  The DOL notes that this will avoid harsh treatment of exempt employees - in the form of a full-week suspension - when a shorter suspension would be appropriate.   Additionally, the preamble states that the term "workplace misconduct" refers to conduct such as sexual harassment, violence, drug or alcohol violations, or violations of state or federal law.  The term does not include performance or attendance issues.  

The final rule also provides that an employer who makes improper deductions from salary will lose the exemption if the facts demonstrate that the employer did not intend to pay employees on a salary basis.  The rule further provides that an "actual practice" of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis.  The rule delineates the factors to be considered when evaluating whether an employer has an actual practice of making improper deductions.  The "actual practice" language is a departure from the DOL's prior position, which was adopted by the U.S. Supreme Court in Auer v. Robbins.  In Auer, the Court, deferring to the DOL's interpretation, held that exempt status can be denied when there is either an actual practice of making improper deductions or an employment policy that creates a significant likelihood of such deductions.  The preamble to the final rule notes that the "significant likelihood" language is not found in the FLSA and that nothing in Auer prohibits the DOL from making changes to the salary basis regulation after appropriate notice and rulemaking.

The final rule also provides that if an employer has an actual practice of making improper deductions, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the improper deductions.  Employees working for different managers or in different classifications do not lose their exempt status.

Window of Correction - The final rule attempts to clarify the window of correction provision found in the prior rule, stating that isolated or inadvertent deductions will not result in the loss of the exemption if the employer promptly reimburses the employee for the deduction.  The preamble to the final rule provides that inadvertent deductions are those taken unintentionally, for example, as the result of a clerical or time-keeping error.  The preamble further provides that the reimbursement does not have to be made immediately upon discovery of the inadvertent deduction for the window of correction to apply.  This is in keeping with the prior law.  Additionally, the DOL states that the revised window of correction provision and the new safe harbor provision found in §541.603(d) (discussed below) should resolve the conflict in case law regarding whether inadvertent deductions were taken for reasons other than lack of work.

New Safe Harbor - Section 541.603(d) of the final rule contains a new "safe harbor" provision and states that if an employer: (1) has a clearly communicated policy that prohibits the improper pay deductions and includes a complaint mechanism; (2) reimburses employees for any improper deductions; and (3) makes a good faith commitment to comply in the future, the 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.  If an employer fails to reimburse employees for any improper deductions or continues to make improper deductions after receiving employee complaints, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions.

Additional Compensation - The final rule provides that an exempt employee may receive compensation beyond the minimum amount that is paid as a guaranteed salary, if the employment arrangement also includes a guarantee of at least the minimum weekly-required amount paid on a salary basis.  Examples of such additional amounts include commissions or percentages of sales or profits.  The final rule also provides that an exempt employee's earnings may be computed on an hourly, a daily, or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days, or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned.  This provision incorporates the DOL's prior interpretation of the salary basis requirement, set forth in the DOL's Field Operation Handbook and opinion letters.

Fee Basis - The final simplifies the fee basis provision that was contained in the prior rule, but does not make any substantive changes to the provision.  The final rule is identical to the proposed revision.  The fee basis provision applies to administrative and professional employees, as under the prior rule.

Duties Tests

The new rule generally changes the duties tests for the white collar exemptions by eliminating the long and short tests and combining them in one test.  Following is a summary of the ways in which the duties test have changed for each of the exemptions:     

Executive Employees:   

·         For executive employees, the final rule requires authority to hire or fire employees or recommend hiring or firing employees (with recommendations being given particular weight), in addition to the requirements in the previous rule that the employee manage the enterprise (or a recognized department or subdivision of the enterprise) and regularly direct the work of two or more other employees. 

·         The final rule provides a new definition of the term "particular weight," stating that factors to be considered include, but are not limited to: whether it is part of the employee's job duties to make such suggestions and recommendations; the frequency with which the employee does so or is requested to do so; and the frequency with which the employee's suggestions and recommendations are relied upon. Generally, an executive's suggestions and recommendations must pertain to the employees the executive directs; this does not include an occasional suggestion with regard to the change of status of a co-worker.  An employee's suggestions and recommendations may still be considered to have particular weight even if a higher-level manager's recommendation has more importance and even if the employee does not have the authority to make the ultimate decision as to the employee's change in status.   

·         Although the final rule does not define the term "change of status", the preamble to the rule states that the DOL intends this term be given the same meaning as that given by the U.S. Supreme Court in defining the term "tangible employment action" for the purposes of Title VII liability.  The Court has defined this as a "a significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits."  Burlington Indus. Inc. v. Ellerth, 524 US. 742 (1998). 

·         Additionally, the final rule deletes the special rules applicable to "sole charge" executives.

·         The final rule also requires that for an employee who owns at least a 20% equity interest in an enterprise in which the employee is employed to be considered an exempt executive, the employee must be actively engaged in the management of the enterprise.  The requirement that the owner be actively engaged in the management of the enterprise was not contained in the prior rule.  Under the final rule, the salary requirement does not apply to this provision of the executive exemption.

·         The final rule retains the prior rule's description of types of conduct that qualify as managerial duties but adds planning and controlling the budget and monitoring or implementing legal compliance measures.

·         The final rule also provides that the performance of nonexempt work does not disqualify an employee from the executive exemption if he or she otherwise meets the requirements for this exemption and provides an example of an assistant manager in a retail establishment who also performs some nonexempt work.

·         The final rule eliminates the percentage limitation on non-exempt work found in the old rule. (Under the prior rule, no more than 20% (or 40% in the case of an employee of a retail or service establishment) of the hours in a workweek could be spent on nonexempt work.) 

Administrative Employees: 

·         For administrative employees, the final rule retains the requirement that the employee's primary duty must be performing office or non-manual work directly related to the management or general business operations of the employer or the employer's customers. 

·         The final rule retains the requirement, which was eliminated in the proposed rule, that administrative employees exercise discretion and independent judgment, but adds that this must be with respect to matters of significance.

·         The final rule does not adopt the proposed revision's "position of responsibility" test, which included the "high level of skill or training" standard.

·         The final rule eliminates the prior rule's requirement that administrative employees not spend more than 20% (40% in retail or service establishments) in activities not directly related to exempt work. 

·         The final rule also provides examples of the types of employees who would meet the administrative exemption's duty requirements, including insurance claims adjusters if they perform certain activities such as conducting interviews, inspecting property damage, evaluating and making recommendations regarding coverage of claims, the total value of a claim, negotiating settlements, and making recommendations regarding litigation. 

·         Additionally, the final rule notes that employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as 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; and marketing, servicing or promoting the employer's financial products.  However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.

Professional Employees: 

·         The language of the final rule tracks that of the old rule, then lists the three elements of the duties test separately.  The final rule does not change the educational requirements for the professional exemption.  The references to training in the armed forces, attending a technical school, and attending a community college, which were contained in the proposed regulation, have been removed.

·         The final rule provides that work requiring advanced knowledge, one of the three essential elements of the professional primary duties test, is work that is "predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment."

·         The final rule provides examples of types of employees who meet the duties test for the learned professional exemption.  

Computer Employees:  

·         The final rule makes no substantive changes from the prior rule in the language of the primary duties test for the computer exemption but does remove the limitation contained in the prior rule that limited the exemption to employees who work in software functions.  The final rule states that the exemption found in § 13(a)(1) of the FLSA applies to employees who are compensated on a salary or fee basis of not less than $455 per week and the § 13(a)(17) exemption applies to computer employees compensated on an hourly basis at a rate not less than $27.63 per hour.  

·         The final rule does not contain the job title examples included in the prior rule and notes that job titles change quickly in the computer industry and do not determine the applicability of the exemption. 

·         The final rule does not adopt language in the proposed rule that discussed the high level of skill and expertise in "theoretical and practical application" of specialized computer systems knowledge as a prerequisite for exemption.

·         As in the prior rule, the final rule provides that the computer exemption does not apply to employees engaged in the manufacture or repair of computer hardware and related equipment. 

·         The final rule also provides (as did the prior rule) that computer employees within the scope of the exemption, as well as some who are not within its scope, may also qualify for the executive or administrative exemptions, depending on their duties.

Editor: Todd A. Wiggins (twiggins@cpmas.com) (This publication is the property of the Atlanta Association of Legal Administrators. Reproduction or reprint without prior permission is strictly prohibited. Click here to request reprint permission.)

Designed/Distributed By