On April 20, 2004, the United States Department of Labor (DOL) announced the final regulations governing overtime eligibility for white collar workers under the Fair Labor Standards Act (FLSA). Barring Congressional action, the new regulations will take effect on August 23, 2004.

The regulations may significantly change companies exempt/non-exempt classifications, payroll expenses, and management practices if classifications are changed. Companies with relatively low-salary earners who have supervisory responsibilities or management related responsibilities, and workers with advanced education or specialized training, may be penalized. For example, nurses, retail managers, insurance claims adjusters, medical therapists, policemen and firefighters many no longer qualify for overtime. As a result, companies may face morale problems from those current non-exempt employees who have grown dependent on overtime pay as a regular part of their salary. To those employees, a loss of overtime eligibility could adversely affect their standard of living.

Employers should use the time between now and August 23, 2004, to determine the impact, if any, of the final regulations on their current compensation policies and practices. This requires employers to analyze the new regulations, conduct a compliance review of present employee classification and pay practices, and revise policies and practices where needed.

I. Current FLSA Regulations On Overtime

Under current FLSA regulations, exempt employees do not receive overtime pay and are not covered by the overtime pay provisions of the FLSA. For exempt employees, pay is not based on the amount of time spent at work, but rather is based on getting the job done.

Non-exempt employees are entitled to a mandated minimum wage, as well as overtime pay of not less than one-and-one-half times their regular hourly rate of pay for all hours worked in excess of 40 in their work week. Non-exempt employees are also required to account for all time worked as well as the use of sick, vacation, and other leave time on an hourly basis.

The most common FLSA exemptions are the white collar exemptions: executive, administrative, and professional. In determining whether an employee falls within one of the white collar exemptions, there are two basic criteria:

  • the employee receives a required weekly minimum salary that is not subject to reduction except in very limited, specified circumstances (the required minimum amount is set by FLSA regulations); and
  • the employee performs exempt job duties as defined by FLSA regulations.

II. Significant Changes to the FLSA Regulations Affecting Employers

A. Renewed Importance of Compensation In Minimum Weekly Salary Requirement

Under the current regulations, executive, administrative, and professional employees must receive a required weekly minimum salary level in order to be exempt. 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), the so-called .long. test is applied to the employee's job duties. The long test specifies in some detail the duties, responsibilities, and obligations that the employee must have in order to be considered exempt. The more lenient "short" test is applied if an employee earns a salary of at least $250 per week. The short test sets forth fewer conditions related to the employee's duties, but requires a higher minimum salary for the employee to be exempt.These weekly salaries have not been changed since 1975. The result is that an employee is determined to be "exempt" based almost solely on the duties he or she performs (the other criteria for exemption) rather than on his or her salary level.

The new regulations significantly raise the weekly minimum salary threshold required to be considered exempt. For an employee to meet one of the executive, administrative, or professional exemptions, he or she must receive a minimum weekly salary of $455--the equivalent of an annual salary of $23,660. The DOL has removed any requirements relating to different weekly minimum salaries and different job duties tests depending on those salaries.

B. Disciplinary Pay Docking

The new regulations modify the "no pay docking" rule for exempt employees. The "no pay docking" rule by and large prohibits any reduction in compensation because of variations in the quality or quantity of work performed, and requires payment of a full week's salary for any week in which the employee performs any work. An employer who improperly docks pay from an exempt employee runs the risk of causing that employee to lose his or her exempt status.

Under the new regulations, employers still cannot deduct pay from exempt employees for days off, in most situations. While clarifying the exceptions to the "no pay docking" rule, the new regulations provide employers with the option of docking exempt workers a full day's pay for certain serious disciplinary infractions (such as violation of a sexual harassment policy) without jeopardizing their exempt status.

C. Special Rule for "Highly Compensated Employees"

The new regulations provide an automatic exemption for highly compensated employees. Employees with total compensation packages of at least $100,000 per year (including base salary, commissions, and non-discretionary bonuses) will be considered "exempt" if, in addition, they: (a) receive at least $455 per week; (b) perform "office or non-manual work"; and (c) "customarily and regularly perform" any one or more of the exempt duties of an executive, administrative, or professional employee on a regular and recurring basis. This "highly compensated" test includes a $35,000 increase over the $65,000 "super salary test" contained in the proposed revisions to the regulations.

D. Changes to the Job Duties Test--One Standard Test Within Each Category

Under both the current and new regulations, an employee fits into one of the white collar exemptions from overtime pay only if he or she makes a certain minimum weekly salary and performs exempt job duties. This latter requirement is sometimes called the "duties test." White collar exemptions are limited to employees who perform relatively high-level work exercising independent judgment and discretion. Whether a particular job is exempt depends upon the nature of the particular duties performed. Job titles or position descriptions are of limited use; it is the actual job tasks that must be evaluated.

The new regulations create a standard "job duties" test for each respective white collar category. The short test and the long test distinction is eliminated. Instead, if the employee meets the weekly minimum salary requirement of $455, only one test--the standard job duties test for that category of exemption--will be used. A thorough discussion of the new job duties test for each job category is beyond the scope of this article. For more specific information on how the new single-standard tests differ from the current tests, please visit the Department of Labor's website for a side-by-side comparison table-- www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm. However, significant portions of the new tests are highlighted below:

Executive Duties: An exempt "executive employee" must be paid a salary of at least $455 per week and: (1) have the "primary duty" of the management of the enterprise or a recognized department or subdivision; (2) customarily and regularly direct the work of two or more other employees; and (3) have the authority to perform such duties as hiring, firing, promoting, or to make recommendations in these areas that are given particular weight. To clarify the requisite degree of managerial influence, the final rule provides clarification of the term "particular weight." For example, if the employee.s suggestions are frequently followed, this may suggest the employee exercises managerial influence.

Administrative Duties: An exempt "administrative employee" must be paid on a salary or fee basis at a rate not less than $455 per week and: (1) have the "primary duty" of performing office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers; and (2) customarily and regularly exercise discretion and independent judgment. Note that the job duties criteria for exempt administrative employees are essentially the same as the current short test. The final regulations deleted the requirement in the proposed regulations that the exempt administrative employee must hold a "position of responsibility."

Professional Duties: Under the new regulations, professionals will be broken down into two groups-- "learned professionals" and "creative professionals". An exempt "learned professional" employee must be paid on a salary or fee basis at a rate not less than $455 per week and have the "primary duty" of performing office or nonmanual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but which can be acquired by alternative means such as an equivalent combination of intellectual instruction and work experience. The focus of this exemption will now be the knowledge of the employee as opposed to the employee's education.

An exempt "creative professional" employee must be paid on a salary or fee basis at a rate not less than $455 per week and have the primary duty of performing work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

E. Computer Employee Exemption

The computer employee exemption will apply to any computer employee who is compensated on a salary or fee basis at a rate of not less than $455 per week (or on an hourly basis at a rate not less than $27.63 per hour). Employees satisfy the duties test for this exemption if they are involved in: 1) the application of systems analysis techniques and procedures, including consulting with users; 2) design, development, documentation, analysis, creation, testing, or modification of computer systems or programs; or 3) a combination of such duties.

F. "Blue Collar" Workers and "First Responders" Guaranteed Overtime

New sections have been added to the regulations clearly stating that manual laborers or other "blue collar" workers who perform work involving repetitive operations with their hands, physical skill and energy are entitled to overtime. Such non-exempt "blue collar" employees gain the skills and knowledge required for performance of their routine manual and physical work through apprenticeships and on-the-job training. Further, "first responders," such as police officers, firefighters, paramedics, emergency medical technicians and licensed practical nurses, are entitled to overtime under the new regulations.

III. What Employers Should Do Before August 23, 2004

Between now and August 23, 2004, employers have an opportunity to prevent potential liability for the misclassification of employees in their workforce. Now is the time for employers to consider how their compensation practices, personnel policies, and employee manuals should be amended, if at all. Employers should formulate detailed plans to address the needed changes. Components of such a plan should include:

  • Examine the salaries of employees and identify those employees who may no longer be exempt due to the $455 weekly minimum salary threshold;
  • Decide whether particular employees should be classified as "non-exempt," rather than adjusting their salaries to comply with the definition of "exempt" under the new regulations;
  • Assess the job duties and salary of those employees under the new regulations for inclusion in one or more of the white collar exemptions;
  • and Anticipate employee reaction--get together with your corporate communications team and coordinate how you are going to convey the new regulations to your employees.

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